The term 'Due Diligence' is included in the Corporate Finance edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
The phrase due diligence is utilized to discuss a wide variety of legal obligations, assignments, investigations, and reports. These all are practiced in business, manufacturing and law. The most commonly used version of the phrase has to do with businesses.
In business, the concept of due diligence pertains to the process gone through by venture capitalists in advance of pouring funding into a start up company. Also involved with this are investigations that continue later into the ways that the monies are being spent. Large companies similarly engage in such due diligence before making the decision to buy out a smaller company.
Venture capitalists practice a particular brand of due diligence that involves researching the present and past players and structures of the firm that is looking for venture funding. Venture capitalists are careful about putting money into firms that do not feature principals who showcase either a track record that is well proven or at least impressive credentials.
Such a due diligence investigation could be stricter or more relaxed based on the prevailing amount of caution held by the investment community at any given time. With most venture capitalist firms, there will be more than a dozen investigators employed who spend their time investigating particular information on the personal histories of the corporation’s personnel. This task has become far easier than ever before thanks to the rise of the Internet and all of the subsequent access to information that is now available. Looking into an individual’s experience and associations is now far quicker and more convenient.
Due diligence is also used for background checks. When venture capitalist decision makers make up their mind concerning the prospective firm, they will order these done. Most of the time, such venture capitalist partners will want to give funds to individuals that they either feel confident can be trusted, or to whom they have disbursed funds before with other ventures.
Despite the practice of due diligence, it does not guarantee that the investment will not fail. Companies that are comprised of successful proven people with tremendous educational backgrounds and practical experience still fail all of the time because of competition that no one foresaw coming, difficult conditions in the market, or even technical difficulties with products.
Due diligence involves a different understanding from one company to the next firm. Within the business of manufacturing, some environmental protections have to be taken. These are checked out in the due diligence report having to do with environmental site assessments. Such a report contains specifications in a checklist, as well as available sections for commentary.
Due diligence is also used by law firms concerning care that should be taken by companies or individuals in a particular scenario. An example of this might be a company making certain that their product was thoroughly checked out in advance of selling it and then finding out that it might be poisonous or harmful in strangling incidents. Should they not do this due diligence, then they may be charged with criminal negligence.