Due Diligence

Originally referred to the level of investigation that professional advisors should, if not negligent, perform on behalf of a purchaser into title and other issues surrounding an asset being acquired. It is now generally taken to refer to examining the files, contracts, licenses, intellectual property, deeds, and other papers and property of a business being acquired to determine if there are any undisclosed liabilities, losses, or risks.

A certain amount of cynicism exists about the due diligence process, since it is largely carried out by the most junior lawyers and accountants the acquirer’s advisors have (usually under instructions to cause little trouble or disruption); given such persons’ lack of authority and experience, how likely are they to find something managers and employees at the target are successfully concealing, often from their own superiors, auditors, and advisors?

Moreover, even where substantial problems are found during due diligence, if a merger has been publicly announced, management prestige and company politics, as well as the vested interest of some powerful advisors in completing the deal, often means that only massive problems are enough to stop the transaction. Effective due diligence should, insofar as possible, be built around a pre-established business case for the transaction.