Short definition: Due diligence is an investigation or audit of a potential investment or business transaction to confirm all facts and financial information.
Explanation: It is a comprehensive process of gathering and analyzing information to assess the risks and opportunities associated with a transaction. Due diligence typically involves reviewing financial statements, contracts, legal documents, and other relevant information to ensure that all material facts have been disclosed and that there are no hidden risks or liabilities.
Example: Before acquiring another company, a buyer would conduct due diligence to assess the target company’s financial health, legal compliance, operational efficiency, and potential risks.
Additional information (optional): Due diligence is a crucial step in any major business transaction, as it helps to mitigate risk and ensure that the parties involved have a clear understanding of the deal. It is typically conducted by a team of experts, including lawyers, accountants, and financial analysts.