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Due diligence is the method through which a company’s performance is thoroughly assessed before a transaction. It involves analyzing, collecting and analyzing extensive quantitative and qualitative information in order to mitigate risks and ensure compliance with legal requirements and contribute to efficient decision-making. Due diligence is usually performed by companies that are contemplating the possibility of a partnership, acquisition, or merger.
Although a thorough analysis can help identify potential risks and opportunities, implementing it can be challenging. It isn’t easy to determine which questions to ask, which documents to look over and who is accountable for each step of the process. It can also take a long time to collect and analyze data.
Due diligence can be accelerated by setting specific goals and expectations before the M&A process begins. In the same way, using a VDR that includes project management capabilities lets teams break down the process into logical segments. They can then check off items after each section has been completed.
It’s also important to realize that no matter how thorough the due diligence procedure is, it may never reveal every possible issue. It is essential for a business to have a continuous monitoring and mitigation strategy to monitor third parties and vendors, as well as businesses that have been acquired.
The concept of ‘due diligence’ was first legally codified four years following the 1929 stock market crash following the passage of the Securities Act of 1933, which created transparency in financial markets by requiring security brokers to provide pertinent and accurate information regarding their securities. The term has since made its way into the business world, where it’s used to refer to the prudent and careful action that reasonable people are expected to take in order to limit risk and prevent negative outcomes.