Due Diligence
Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under
consideration. In the financial world, due diligence requires an examination of financial records before
entering into a proposed transaction with another party.
Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision.
An individual investor can conduct due diligence on any stock using readily available public information.
The same due diligence strategy will work on many other types of investments.
Due diligence involves examining a company’s numbers, comparing the numbers over time, and
benchmarking them against competitors.
Due diligence is applied in many other contexts, for example, conducting a background check on a
potential employee or reading product reviews.
In the mergers and acquisitions (M&A) world, a company that is considering a deal will perform a financial
analysis on a target company. The due diligence might also include an analysis of future growth. The
acquirer may ask questions that address the structuring of the acquisition. The acquirer is also likely to
look at the current practices and policies of the target company and perform a shareholder value analysis.
In traditional M&A activity, the acquiring firm deploys risk analysts who perform due diligence by studying
costs, benefits, structures, assets, and liabilities. That’s known colloquially as hard due diligence.
Increasingly, however, M&A deals are also subject to the study of a company’s culture, management, and
other human elements via soft due diligence.