Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.
It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition.
The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks.
Due diligence involves an in-depth investigation of the business. It requires review of a lot of documents by a attorney and a review of the financial reports and tax returns by your financial advisor or accountant. By conducting due diligence on the target business, you will have a thorough understanding of the business — being better able to ascertain a fair purchase price of the business, and identify any surprise business liabilities for which you likely will be liable after you become the business owner.
Due diligence also is important because, depending on the outcome of the due diligence, you (perhaps with the help of a attorney) may want to incorporate certain seller obligations in the term sheet of the deal (e.g., clearing any liens on the assets of the business, obtaining required third party consents, etc.).
For more information please contact our office now to set up an appointment with attorney Daniel Lenghea to determine the best cause of action.