Due Diligence

Before buying a company, investing in a business or lending money, the buyer wants to be sure they understand what they are getting. Due diligence involves examining the target's finances, operations, legal position and other key areas.

Common areas of due diligence include financial due diligence, reviewing accounts, cash flow, debt and the quality of earnings; legal due diligence, examining contracts, disputes, ownership of assets and regulatory compliance; commercial due diligence, assessing the market, competitors and customers; tax due diligence; and, increasingly, technology, cybersecurity, environmental and human resources reviews.

For example, a company planning to acquire a competitor might discover during due diligence that the target is facing a major lawsuit or that a large customer is about to leave. This could lead the buyer to lower its offer, ask for protections in the contract or walk away from the deal.

Due diligence is usually carried out with the help of accountants, lawyers and other specialists, often using a secure online data room where the target shares documents. Thorough due diligence reduces the risk of unpleasant surprises after a deal, although it cannot eliminate all risks.