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due diligence |
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Due diligence |
Investment Dictionary:
Due Diligence - DD |
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Investopedia Says:
1. Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
2. Due diligence is essentially a way of preventing unnecessary harm to either party involved in a transaction.
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Banking Dictionary:
Due Diligence |
1. Banking. The responsibility of bank directors and officers to act in a prudent manner in evaluating credit applications; in essence, using the same degree of care that an ordinary person would use in making the same analysis.
2. Securities. The responsibility of securities underwriters to explain relevant details of a new issue of securities to interested purchasers. Called a due diligence meeting.
3. General Business. In a corporate Merger or Acquisition close examination of the books to examine the quality of both assets and liabilities of a target company.
Real Estate Dictionary:
Due Diligence |
1. Making a reasonable effort to perform under a contract.
Example: A prospective homebuyer signed a sales contract contingent on the sale of her present residence. She is expected to use due diligence in marketing her present house.
2. Making a reasonable effort to provide accurate, complete information. A study that often precedes the purchase of property, which considers the physical, financial, legal, and social characteristics of the property and expected investment performance; the underwriting of a loan or investment.
Example: The pension fund sent various experts to perform a due diligence study of a property it was considering for purchase. Matters to be considered included the mechanical and electrical systems of the building, local market conditions and competition for the property, and environmental hazards.
3. Examination of property to detect the presence of contaminants.
Example: Before lending on a shopping center, the lender insisted on an Environmental Audit as part of its due diligence.
Small Business Encyclopedia:
Due Diligence |
Due diligence is a program of critical analysis that companies undertake prior to making business decisions in such areas as corporate mergers/acquisitions or major product purchases/sales. The due diligence process, whether outsourced or executed in-house, is in essence an attempt to provide business owners and managers with reliable and complete background information on proposed business deals, whether the deal in question is a proposed acquisition of another company or a partnership with an international distributor, so that they can make informed decisions about whether to go forward with the business action. "The [due diligence] process involves everything from reading the fine print in corporate legal and financial documents such as equity vesting plans and patents to interviewing customers, corporate officers, and key developers," wrote Lee Copeland in Computerworld. The ultimate goal of such activities is to make sure that there are no hidden drawbacks or traps associated with the business action under consideration.
Many companies undertake the due diligence process with insufficient vigor. In some cases, the prevailing culture views it as a perfunctory exercise to be checked off quickly. In other instances, the out-come of the due diligence process may be tainted (either consciously or unconsciously) by owners, managers, and researchers who stand to benefit personally or professionally from the proposed activity. Businesses should be vigilant against letting such casual or flawed attitudes impact their own processes, for an efficient due diligence process can save companies from making costly mistakes that may have profound consequences for the firm's other operational areas and/or its corporate reputation.
Areas of Due Diligence
The due diligence process is applied in two basic business situations: 1) transactions involving sale and purchase of products or services, and 2) transactions involving mergers, acquisitions, and partnerships of corporate entities. In the former instance, purchase and sales agreements include a series of exhibits that, taken in their entirety, form due diligence of the purchase. These include actual sales contracts, rental contracts, employment contracts, inventory lists, customer lists, and equipment lists. These various "representations" and "warranties" are presented to back up the financial claims of both the buyer and seller. The importance of this kind of due diligence has been heightened in recent years with the emergence of the Internet and other transformative technologies. Indeed, due diligence is a vital tool when a company is confronted with major purchasing decisions in the realm of information technology. "A due diligence investigation should answer pertinent questions such as whether an application is too bulky to run on the mobile devices the marketing plan calls for or whether customers are right when they complain about a lack of scalability for a high-end system," said Copeland.
In cases of potential mergers and acquisitions, due diligence is a more comprehensive undertaking. "The track track record of past operations and the future prospects of the company are needed to know where the company has been and where its potential may carry it," explained William Leonard in Ohio CPA Journal. In addition, observers note that the dramatic increase in information technology (IT) in recent years has complicated the task of due diligence for many companies, especially those engaged in negotiations to buy or merge with another company. After all, system incompabilities can require huge amounts of time, money, and personnel resources to integrate.
Leonard notes that traditional due diligence practices in acquisition/merger scenarios called for detailed examination of financial statements, accounts receivable, inventories, workers compensation, employment practices and employee benefits, pending and potential litigation, tax situation, and intellectual property prior to signing on the dotted line. But in this dynamic business era, other areas should be looked at as well, including (if applicable): intellectual property rights, new products in the production pipeline, status of self-funded insurance programs, compliance with pertinent ordinances and regulations, competition, environmental practices, and background of key executives/personnel.
Many business experts also caution that the due diligence process is incomplete if it does not incorporate an element of objective self-analysis. "Self-analysis is the fundamental first step to realistically determine whether the post-acquisition 'whole' will be greater than the sum of its part," wrote Aaron Lebedow in Journal of Business Strategy. A detailed assessment of the market that is the target of the proposed acquisition should also be undertaken prior to closing a deal. Both of these requirements can be completed in a reasonable period of time, even in today's fast-changing business environment, by companies that either 1) outsource the due diligence task to a reputable research firm or 2) build an efficient in-house program within their legal, marketing, or corporate security sectors. "Unquestionably, opportunities for growth through acquisition exist," stated Lebedow. "Exploiting these opportunities has risks, but to those companies that acquire only after a comprehensive and systemic assessment of the marketplace and competition, the rewards justify the risks. Limiting due diligence to financial and managerial review is rarely enough. Successful acquisition strategy depends on the structure and depth of the due diligence process."
Supplementing Due Diligence
Growing numbers of business enterprises are pursuing additional legal protection for themselves so as to shield themselves from harm if their due diligence efforts fail to uncover a serious problem with a merger or purchase transaction. One means of mitigating the risks associated with such major business transactions that has become increasingly popular in recent years is to secure a form of insurance coverage known as "representations and warranties liability insurance." A growing number of insurance underwriters are providing these policies, which call for them to pay insured parties for losses resulting from various "wrongful acts." This umbrella term generally covers errors, misstatements, misleading information, etc., but underwriters do include exclusions, some of which should be noted by potential buyers. These include acts of "fraud" (if adjudicated in the courts), pollution (which is typically covered under separate policies), or situations in which a party has received benefits—financial or otherwise—to which it is not entitled. One significant benefit of "representations and warranties liability" policies, however, is that the coverage can be used in place of reserves, escrow, or indemnity provisions that are included in purchase agreements.
Premiums for such policies can be expensive, especially for small and mid-sized firms with limited financial resources. Moreover, securing such insurance is a time-consuming and painstaking process, for underwriters are putting themselves at considerable financial risk. "Premiums will be determined based on the risk and the comfort level of the underwriter," summarized Leonard. ""It is most important that the process start early and not be left to a time when someone gets a 'feeling' things may not be entirely up to snuff. Although this type of coverage can be purchased after the closing, understandably the most beneficial time to place the coverage is during the due diligence phase preceding the closing."
Further Reading:
Bernstein, Leopold A., and John J. Wild. Analysis of Financial Statements. McGraw-Hill, 2000.
Copeland, Lee. "Due Diligence." Computerworld. March 6,2000.
Kroll, Luisa. "Gotcha: Pushing the Limits of Due Diligence." Forbes. October 30, 2000.
Lebedow, Aaron L. "Due Diligence: More than a Financial Exercise." Journal of Business Strategy. January 1999.
Leonard, William J. "Representation and Warranties—When Due Diligence Fails." Ohio CPA Journal. January 2000.
Schilit, W. Keith. The Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital. Prentice Hall, 1990.
Wikipedia:
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Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person prior to signing of a contract, or the performance of 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 acquisition.[1]
The term "due diligence" first came into common use as a result of the United States' Securities Act of 1933.
The US Securities Act included a defense referred to in the Act as the "Due Diligence" defense which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities.
So long as broker-dealers exercised "due diligence" in their investigation into the company whose equity they were selling, and disclosed to the investor what they found, they would not be held liable for nondisclosure of information that was not discovered in the process of that investigation.
The entire broker-dealer community quickly institutionalized, as a standard practice, the conducting of due diligence investigations of any stock offerings in which they involved themselves.
Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations.
In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.[2]
With the number and size of penalties increasing, the Foreign Corrupt Practices Act (FCPA) is causing many U.S. institutions to look into how they evaluate all of their relationships overseas. The lack of a due diligence of a company's agents, vendors, and suppliers, as well as merger and acquisition partners in foreign countries could lead to doing business with an organization linked to a foreign official or state owned enterprises and their executives. This link could be perceived as leading to the bribing of the foreign officials and as a result lead to noncompliance with the FCPA. Due diligence in regards to FCPA compliance is required in two aspects:
With origins in the private sector world of business and finance, the term “due diligence” in philanthropy refers to the process through which an investor (or funder) researches an organization’s financial and organizational health and capacity to guide an investment (or grantmaking) decision. The decision to fund or not to fund is based upon a balance of objective data analysis, insight into the general state of organizational health and stability, and intuition. A sound and thorough due diligence review is the process through which all the factors that make up that equation are uncovered and understood. It is the process in which a program officer seeks the “truth” about an organization.[4]
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The examples and perspective in this article may not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (March 2009) |
Due diligence investigation with regard to hedge funds refers to an in-detail review of a hedge fund's activity, conducted in order to ensure that the fund is in compliance with its prospectus. It is a roadmap for existing and potential investors in understanding whether a specific fund will meet his or her investment horizon, risk tolerance and investment strategy. [5] In a non-exhaustive list, due diligence in the United States would consist of an examination of:
Every investor is going to have different investment horizons and risk tolerance, as well as a strategy preference. It thus follows that there is no "best" hedge fund, but a fund that most closely matches investors' preferences. An investor should almost always: [6]
Due diligence in civil litigation is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to meet a standard of behavior. Quite often a contract will specify that a party is required to provide due diligence.
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This article may contain original research. Please improve it by verifying the claims made and adding references. Statements consisting only of original research may be removed. More details may be available on the talk page. (September 2008) |
It is not correct to confuse due care and due diligence. Due care should be spelled out in full as duty of care. It is a legal concept by itself. Duty of care may be very wide, far reaching, and also a grey area subject to argument. Basically, parents owe their infant a duty of care in everything. As the infant grows to be a child, to be an adolescent, an adult, the duty of care and its scope become less and less. Fundamentally, a duty of care is a moral duty to care. When legal acknowledgment is extended to this moral obligation, then this duty becomes a legal requirement. Inversely, the legislature sets the duty in the statute. Then we consider this duty as legal and amoral [the prefix "a-" meaning without, i.e. not having to consider the moral aspect].
When read carefully, care is the passive mode; diligence is the active mode.
First the duty of care (due care) arises, making it a requirement. In order to fulfill this duty, due diligence is exercised. The flow may be continuous, but these two concepts are different. When due diligence is called for, then there will be a set of demands to be complied with, depending on the context. For example, before a surgery, what should be done and who should be present in the theater? After the surgery, what must be done to the patient, equipment, facilities?
As a matter of independent inquiry, whether by a court of law or professional body, the line of investigation is: (1) Is there a duty of care? How is this duty of care imputed? (Previous case law, statute, new case) (2) If the duty of care exists, what are the applicable standards? In other words, what due diligence (and the components that go to make it a comprehensive due diligence) is required?
The last issue is always considered in light of specific circumstances of the case. If brain surgery is involved, the standards are those required of competent brain surgeons. If deep sea welding is involved, the standards are those required of competent deep sea welders. In an auction of a Picasso, due diligence standard must be comparable with an international auctioneer to authenticate an art object. In the sale of a diamond, due diligence may be necessary from human rights and political aspects. As such, expert opinions are often considered.
Due diligence is a term used for a number of concepts involving either the performance of source inspection or source surveillance, or the performance of quality duties such as PVA (Process Validation Assessment) or System Audits with a certain standard of care.
Due diligence in supplier quality (also known as due care) is the effort made by an "SQE" (Safety, Quality and Environment) professional to validate conformance of product provided by the seller to the purchaser. Failure to make this effort may be considered negligence. This is conceptually distinct from investigative due diligence, involving a general obligation to identify true, root cause for non-compliance to meet a standard or contract requirement.
In criminal law, due diligence is the only available defense to a crime that is one of strict liability (i.e., a crime that only requires an actus reus and no mens rea). Once the criminal offense is proven, the defendant must prove beyond a reasonable doubt that they did everything possible to prevent the act from happening. It is not enough that they took the normal standard of care in their industry - they must show that they took every reasonable precaution.
Environmental due diligence during commercial real estate and transactions can include Phase I and Phase II Environmental site assessments. Such assessments are often undertaken in the United States to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the "Superfund law".
Information security due diligence is often undertaken during the information technology procurement process to ensure risks are known and managed, and during mergers and acquisitions due diligence reviews to identify and assess the business risks.
This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)
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 | Computer Desktop Encyclopedia. THIS DEFINITION IS FOR PERSONAL USE ONLY. All other reproduction is strictly prohibited without permission from the publisher. © 1981-2010 The Computer Language Company Inc. All rights reserved. Read more |
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| Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved. Read more |
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| Banking Dictionary. Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved. Read more |
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| Real Estate Dictionary. Dictionary of Real Estate Terms. Copyright © 2004 by Barron's Educational Series, Inc. All rights reserved. Read more |
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| Small Business Encyclopedia. Encyclopedia of Small Business. Copyright © 2002 by The Gale Group, Inc. All rights reserved. Read more |
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| Wikipedia. This article is licensed under the Creative Commons Attribution/Share-Alike License. It uses material from the Wikipedia article "Due diligence". Read more |
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