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What is Due Diligence?

Michael Anissimov
Updated May 17, 2024
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"Due diligence" is a somewhat technical phrase used to describe a range of assignments, legal obligations, reports and investigations that take place in business, manufacturing and law. Its most frequently heard version is the one pertaining to business, where the term refers to the steps taken by venture capitalists before investing a round of capital in a startup, the ongoing investigation as to how the funds are being distributed, or the precautionary steps taken by a larger company in deciding to acquire a smaller company.

Sometimes the term is capitalized as proper noun, and the precise definition varies between firms and organizations. In manufacturing for example, certain environmental requirements must be met, which are verified in an Environmental Site Assessment called a "due diligence report." It consists of a checklist of specifications and sections for open commentary.

In venture capitalism, due diligence involves looking into the past and present of the people and structure of a company requesting venture funding. Venture capitalists are wary of investing in companies that lack people with credentials or a proven track record, for example. Depending on the overall level of caution in the investment environment at the time, an investigation may be more or less stringent. Typically, a venture capital firm will have a dozen or more investigators whose task is to research specific details of the personal history of people in the company. With the Internet, researching a person's past associations and experience has never been easier, much to the delight of investment communities.

Of course, this research is not a guarantee against investment failures. Even a company made up of well-educated high achievers can falter due to unpredictable market conditions, unforeseen competition, or technical setbacks. Due diligence generally refers to the background checks conducted after a venture partner has already made a decision about the company. Typically, partners will prefer to invest in companies led by people they already know are very trustworthy and probably have been given funds in the past.

In law, this term refers to precautions that are supposed to be taken by a person or company in some context. For example, it might ask if the company thoroughly checked their product beforehand to ensure it was non-toxic or was not a strangulation hazard. If it did not, and bad results come of this negligence, the company can be held criminally liable.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Michael Anissimov
By Michael Anissimov

Michael is a longtime WiseGEEK contributor who specializes in topics relating to paleontology, physics, biology, astronomy, chemistry, and futurism. In addition to being an avid blogger, Michael is particularly passionate about stem cell research, regenerative medicine, and life extension therapies. He has also worked for the Methuselah Foundation, the Singularity Institute for Artificial Intelligence, and the Lifeboat Foundation.

Discussion Comments

By anon247389 — On Feb 13, 2012

anon65179 and anon37950: Both of your questions can be answered by the Association of Due Diligence Professionals. Disclosure: I am a Member of the Association, went through their education course and passed the examination for the Certified Due Diligence Professional. I use what I learned all the time every day.

By anon232558 — On Dec 01, 2011

Check with the Association of Due Diligence Professionals. They know all the best due diligence people in the world.

By anon85857 — On May 22, 2010

I don't know how old this thread is but let me say this: Due diligence needs a combination of both traditionally styled and virtually styled intelligence.

You can't rely purely on either one without being let down. Yes there are exceptions, but more common are the rules. An asking price of $5000 may seem kind of high if it was just a check on a Mom and Pop Shop, but your business sounded quite serious.

Perhaps the people you were looking to hire didn't present an itemized list. Sometimes it helps if you give a prospective client a bit of insight. People tend to think this kind of work is just like in the movies or a good TV show, No. Absolutely not. It takes long, it is hard and sometimes you will hit a brick wall.

Question is, what do you do when you hit that first wall? Options: Go over it, under it or right through it. I could add more options but you get the point.

Fact is, you don’t know how many walls there will be. One of the best tunnel makers, ladders and dynamite all rolled up into one is money. You just need to know how to change that cash into the right tool via the right people. That my friends, takes more than a little luck and pocket change.

Do you ever consider how much you spend on private transportation per week? Have you even seen the price of high end equipment these days? Do you think your 40 to 60 hour work week is tiring? Try working a bunch of crazy spilt shifts with no overtime. Throw in a couple of bugs, dogs, snakes, the heat and/or the cold.

Keep it up every day for about three months then tell me you are having a blast. Plus you still have staff to pay along with informants and associates from where ever. $5000? That hardly even covers tipping the bathroom attendant at your suspect's favorite restaurant. Hell, that's not even a cop's salary for three months. Just how long do you people think due diligence takes? Is it A) one-half hour B) Two and a half hours or C) No idea

Some of this stuff needs to be taught in high school or something so when kids grow up they don't get the wrong idea.

By anon80179 — On Apr 26, 2010

Ask anyone in the know and they will tell you that due diligence could be considered an exhaustive review of all business documents and records in an effort to assess the health and viability of the business in question.

It is a shame that some people still think like this, as due diligence can be made a lot less stressful with the right tools in place. While researching the due diligence market I was stunned to find so many businesses still using traditional data rooms for due diligence purposes.

It reminded me of the time when people were using pagers although mobile phones were available and affordable. In this day and age we are told to be sensitive about unnecessary travel, to always keep costs down, to watch our carbon footprint not to mention our heart rate.

Why is it then, that people are still traveling hundreds, if not thousands, of miles to sit in a traditional and boring due diligence data room? Think of all the wasted money spent and at the end of the day, you may not even go ahead with your bid!

Technology moves quickly and in the due diligence world virtual data rooms now exist, embrace virtual data rooms. A Virtual Data Room (VDR) is by far the most convenient way to carry out due diligence. Typically the VDR is simple to use, extremely tight on security, accessible from any part of the world, increases the speed to securing an offer and in general, makes life easy and that is what we are all after.

Remember, your objective is to lower the investors' risk concern and a great VDR like Sterling X-AG will help you do this with ease.

By anon65191 — On Feb 11, 2010

Yes there are companies like Investment banks who do this procedure for you and yes they do charge a commission on the deal amount.

It's mostly the investor who pays for such due diligence. Regards, chel;I

By anon65179 — On Feb 11, 2010

I have looked at a couple of companies offering educational courses for option trading. How can I do due diligence about these. Thanks. --VC

By anon37950 — On Jul 22, 2009

My name is John Allen CEO of Tufflon Records LLC. located in Philadelphia Pa. To my understanding, investors uaually commit due diligence on projects and all people involved. I came extremely close to landing a $5M deal for my business venture but I was told to pay for the procedure. The investor found a due diligence officer and insisted that I pay $5,000 to investigate my self and others. Needless to say the deal did not go through simply because I smelled *scam* !! My question is, is there a due diligence company and (or) firm that does this for my company at a reasonable price. Can I do this myself or is this procedure the investor's obligation and not my own? Please do respond.

Michael Anissimov

Michael Anissimov

Michael is a longtime WiseGEEK contributor who specializes in topics relating to paleontology, physics, biology,...

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