Investigative due diligence

Uses of due diligence

In finance, due diligence is the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loan in order to determine the value of the subject of the due diligence or whether there are any "'skeletons in the closet'".

The potential investor generally uses in-house resources or hires a consulting firm that specializes in due diligence and corporate investigations to investigate the background and principals of the target company. Professional reports from accountants and solicitors will also frequently be included.

Due diligence can also refer to the ongoing activities of pension or investment fund managers in keeping track of the operations, solvency, and trustworthiness of the managers of a corporation in which their fund is invested, or those of the managers of an acquiring corporation toward a target corporation.

Differing concepts of due diligence

In the US, the key factor that separates due diligence from a more in-depth background check is that due diligence reports are always gathered from publicly available information. A due diligence assignment generally includes reviewing press and SEC filings, checking for regulatory and licensing problems, identifying liens and judgments, and uncovering civil and criminal litigation matters. Sophisticated investigators will also search for conflicts of interest, insider trading and press and public records that identify problems that may have occurred under the principal's "watch." Public records often include sensitive data on a target, such as their date of birth and social security number, which can be gathered from credit card records. Unlike a background check, more intrusive methods of surveillance are not used.

By contrast, due diligence in the UK can and frequently does mean an examination of the target's private records, such as the internal audit reports of a company and important contracts. This clearly requires the consent of the company that is the subject of the due diligence, as would be the case for a recommended takeover offer, a private acquisition or a bank loan. Because the investigators have access to sensitive information, the due diligence process is covered by confidentiality undertakings.

Due diligence is also frequently conducted into the probity of sales agents, consultants and distributors, or companies for merger, acquisition or joint venture, to ensure that potential business partners do not carry any liability of bribery and corruption.

In lay terms, due diligence is the responsibility one has to investigate and identify issues, and due care is doing something about the findings from due diligence.

Due diligence reports

The investigative results may be prepared in a "due diligence report" that collates the information uncovered during the due diligence in an orderly way that allows an analysis of the nature of the target and the risks involved in involvement with it. For example, the report on the target of an acquisition will, so far as possible, contain an analysis of the company's financial situation and prospects (including its assets), its contractual relationships with clients and suppliers, its legal risks, its tax position, its employees, its IT systems and anything else relevant to its particular industry.

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