Due diligence
Due diligence is an investigation conducted before a significant decision or commitment to assess relevant facts, risks, obligations, and value.
Due diligence checklist: A structured list of questions and documents used to examine a person, company, asset, or transaction. Checklists organize the inquiry and expose omissions across workstreams.
Mergers and acquisitions: Transactions in which companies combine or one company acquires another. Acquirers investigate a target’s finances, operations, legal obligations, and prospects.
Audit: A systematic examination of records, processes, or controls against defined criteria. An audit follows a defined scope and standard; transaction diligence is tailored to a decision.
Adverse selection: A market problem in which hidden information leads one party to select a riskier counterparty or product unknowingly. Diligence can expose hidden qualities that would otherwise distort a transaction.
Data room: A secure repository where parties share documents for review during a transaction or investigation. The data room supplies records that reviewers test and interpret.
Financial due diligence: An examination of a business’s financial records, earnings, cash flows, and liabilities before a transaction. This workstream tests whether reported financial performance reflects sustainable economics.
Background check: A search of records and references to verify information about a person or organization. A background check is narrower than diligence on a person, company, or transaction.
Purchase price adjustment: A contractual mechanism that changes a transaction’s price based on specified financial measures at closing. Findings about working capital or debt can alter the final amount paid.
Materiality (auditing): The threshold at which an omission or misstatement could affect an informed decision. Materiality helps focus diligence on facts capable of changing the decision.
Legal due diligence: A review of legal records, contracts, disputes, compliance, and obligations before a decision or transaction. Legal review identifies liabilities and restrictions that may affect the deal.