What Is the Meaning of Due Diligence?

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Due diligence is a concept that is inherent in most types of transactions. The goal of due diligence is to provide parties to a transaction all possible information such that the person can make an informed determination and essentially enter into a transaction with open eyes.

  1. Definition

    • Due diligence is the act of performing a reasonable investigation into the facts and circumstances of a transaction to ensure a full and complete understanding of the transaction.

    Real Estate

    • When a person purchases real estate, that person should practice due diligence to make sure the property is in decent condition. Due diligence in a real estate transaction includes, but is not limited to, a review of the surveys, an engineer's inspection of the property, a check on any outstanding violations on the property, a review of any building permits and/or certificates of occupancy for the property and taxes due on the property.

    Business Sales

    • When purchasing a business, it is necessary to perform due diligence. Such due diligence includes, but is not limited to, reviewing the corporate formation, valuation of the business property, the past financial information of the business, assets of the business, debts and liabilities of the business, the projected financial outlook of the business and any ongoing contracts.

    Contracts

    • When entering into a contract, it is necessary for the parties to enter with a full understanding of the terms of the contract and the subject matter. Therefore, the parties should perform due diligence in order to carefully review all details of the subject matter of the transaction.

    Philanthropic Efforts

    • Another area where a person may perform due diligence is when determining what entity to provide a donation to. Not-for-profit charities offer financial statements and other indications to demonstrate how donations are distributed and utilized. When a party seeks to donate, especially when seeking to donate substantial amounts, the party should perform a review of this information to ensure that the organization is legitimately operating.

    Investments

    • Another area where due diligence is appropriate is when making investments. When performing due diligence, one should review the financial information of the entity in which one is investing. Such due diligence can include such actions as a review of the financial history, audits and risk factors.

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