In business terminology, due diligence is the process of examining a company’s finances, contracts, risks, and operations before an acquisition.
A buyer uses due diligence to test whether the target business is worth the proposed price and whether hidden liabilities could change the deal. Reviewers may inspect financial statements, tax records, intellectual property, employment agreements, lawsuits, customer concentration, cybersecurity controls, and regulatory compliance.
The practice became particularly associated with securities law after the United States Securities Act of 1933. The law helped establish a defense for professionals who could show that they had conducted a reasonable investigation before making statements to investors.
Due diligence is broader than an accounting audit. An audit generally provides an opinion on financial statements for a defined period, while acquisition due diligence investigates many commercial and legal questions. The phrase is also used outside mergers, including in investment decisions, partnerships, lending, and property purchases.