Due Diligence

Due Diligence refers to the investigation and evaluation process undertaken before entering into an agreement or a financial transaction. It involves the review of financial records, legal obligations, and other pertinent information to ensure all aspects of the deal are understood and assessed for risk.

Examples of due diligence include:

• In real estate, a buyer conducts due diligence by inspecting the property, reviewing zoning laws, and Checking for Liens.
• In Mergers and Acquisitions, the acquiring company evaluates the financial statements, legal issues, and business operations of the target company.
• Investors perform due diligence on potential startups by assessing their Business Model, financial health, and market potential before Investing.

Cases of due diligence failure:

• The 2008 financial crisis highlighted failures in due diligence, as banks and investors often overlooked risky mortgage-backed Securities.
• The acquisition of the fraud-hit company by a larger firm, where inadequate due diligence led to significant financial losses due to undisclosed liabilities.