What is due diligence?

Due diligence is the process of conducting a thorough investigation of an investment or business opportunity and the individuals or entities associated with it before making a commitment to the opportunity. In the simplest of terms, it is doing your homework BEFORE you sign on the dotted line.

For a small business, this most often reflects the process that precedes the purchase or sale of another enterprise. In that context, due diligence includes things such as verifying the existence of assets being offered as part of the purchase, the review of all binding contracts between the business for sale that will be transferred to the new owners, and an examination of financial statements to assess financial assets and liabilities. From the seller's perspective, due diligence involves a verification of the purchaser's financial resources that are required for the sale. Since due diligence usually requires access to what is considered proprietary information, a confidentiality or non-disclosure agreement is signed by the person conducting the due diligence. This legally prevents that individual from sharing, using, or disclosing confidential information to others.