Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care.
It can be a legal obligation, but the term will more commonly apply to voluntary investigations. A common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits, and risks.
Due diligence is an investigation or audit of a potential investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party. Due diligence can also refer to the investigation a seller does of a buyer; items that may be considered are whether the buyer has adequate resources to complete the purchase, as well as other elements that would affect the acquired entity or the seller after the sale has been completed.
In the investment world, due diligence is performed by companies seeking to make acquisitions, by equity research analysts, by fund managers, broker-dealers, and of course by investors. For individual investors, doing due diligence on a security is voluntary, but recommended. Broker-dealers, however, are legally obligated to conduct due diligence on a security before selling it. This prevents them from being held liable for non-disclosure of pertinent information.
Due diligence became common practice (and a common term) in the U.S. with the passage of the Securities Act of 1933. Securities dealers and brokers became responsible for fully disclosing material information related to the instruments they were selling. Failing to disclose this information to potential investors made dealers and brokers liable for criminal prosecution. However, creators of the Act understood that requiring full disclosure left the securities dealers and brokers vulnerable to unfair prosecution if they did not disclose a material fact they did not possess or could not have known at the time of sale. As a means of protecting them, the Act included a legal defense that stated that as long as the dealers and brokers exercised “due diligence” when investigating companies whose equities they were selling, and fully disclosed their results to investors, they would not be held liable for information not discovered during the investigation.
A standard part of an initial public offering is the due diligence meeting, a process of careful investigation by an underwriter to ensure that all material information pertinent to the security issue has been disclosed to prospective investors. Before issuing a final prospectus, the underwriter, issuer and other individuals involved (such as accountants, syndicate members, and attorneys),will gather to discuss whether the underwriter and issuer have exercised due diligence toward state and federal securities laws.
Due Diligence for Financial Advisors
Although they may not be legally obligated to, a financial advisor should be doing due diligence on funds or products they are interested in for clients. Researching social media for telling or negative posts is a good first step. So is looking into any regulatory actions that may have taken place at an investment management firm. Advisors should also make sure to research whether or not an investment firm has been involved in any kind of lawsuits, including those that were settled outside of court. Lawsuits that are settled often won’t appear in a company’s public documents, but they can serve as a warning about how the firm handles its business.
Bankruptcy filings and criminal records can also be found in locations where a particular manager may reside or work, and are another example of documents that should be reviewed. Clearly, they would serve as a red flag when considering whether or not to do business with this firm. Another important step to take is to verify the educational credentials that a manager may lay claim to.
The Web Lender Portal exists to facilitate corporate finance worldwide.
Acquisition Loans, Asset Finance, Bridge Loans, Business Credit Lines, Construction Loans, Corporate Finance, Debt Finance, EBITDA, Equipment Finance, Equity Finance, Factoring, International Finance, Joint Venture, Mezzanine Finance, Secured Loans, Term Loans, Trade Finance, Venture Capital.
Serving these sectors:
Accommodation, Aerospace, Agriculture, Biotechnology, Commercial Real Estate & Development, Construction, Energy, Entertainment, Health Care, Hotels, Infrastructure Development, IT/Telecommunications, Manufacturing, Mining, Natural Resources, Oil & Gas Exploration & Pipelines, Power Distribution, Power Generation, Power Plants, and Renewable Energy
THE WEB LENDER PORTAL
Facilitating lateral cost effective financial solutions worldwide