In the U.S., due diligence describes a general duty to exercise care in any transaction. A due diligence can make the difference between success and failure. Its basic function is to assess the benefits and the liabilities of a proposed acquisition by:
– Examining financial statements
– Assessing management and operations
– Reviewing legal liabilities
In general, the extension of a due diligence process goes as far as the buyer wishes to go and how much money it has to investigate the subject company of the transaction. In all cases though, a due diligence goal is to identify potential “material” (relevant) risks that could be important later.
This process starts after a letter of intent is drafted and agreed upon certain conditions where seller and buyer lay down the rules for the due diligence and further steps; at this point, both parties agree to:
1. an allotted time available, and
2. a promise of timely access to the selling company’s personnel, sites, and files.
In this process, the buyer and all its advisors must abide by a confidentiality and non-disclosure agreement