Due diligence is the method that ensures that a company is thoroughly analyzed prior to a transaction. It involves analyzing and collecting quantitative and qualitative information to minimize risks and ensure compliance with the laws, and take effective decisions. Due diligence is typically done by companies that are considering a merger, partnership, or acquisition.
An in-depth investigation can help identify opportunities and risks, but implementing the findings isn’t always easy. It can be difficult to know what questions to ask, which documents to go through and who is accountable for each step of the process. It can also take a lot of time to collect and analyze data.
Due diligence can be speeded up by setting clear objectives and expectations prior to when the M&A process begins. Similarly, using a VDR with project management capabilities can allow teams to break down the process into sections that are logical and efficiently mark off tasks as they’re completed.
It’s also important to note that regardless of how thorough the due diligence process is, it will never reveal every possible issue. It is essential for a business to have a continuous monitoring and mitigation strategy to monitor vendors and third parties, as well as businesses that have been acquired.
The term “due diligence” was legally defined four years following the 1929 crash of the stock market. The Securities Act of 1933 induced transparency in the financial market by requiring brokers to disclose pertinent, accurate information about their securities. Since then the term has been used in business to define the shrewd and responsible actions that a reasonable individual should undertake to minimize risk and avoid bad outcomes.