Due Diligence

The idea is reasonable care: a party who looked properly before acting is in a better position than one who did not. The scope depends on the purpose. Financial due diligence reviews accounts and liabilities in an acquisition; legal due diligence checks contracts, claims and ownership; integrity or compliance due diligence looks at the people, their reputation, sanctions status, links to officials and past conduct. Firms also run it on suppliers, agents and investment targets, including for human rights and environmental harm. Intensity should match risk, so low-risk partners get light checks and sensitive ones get deeper work, which is the logic behind risk-based and sector-specific approaches. Results are recorded, decisions are approved at a suitable level, and the work is repeated if circumstances change. In banking, customer due diligence is the version required by anti-money-laundering rules. Buyers who skip it tend to learn about the recall claim, the tax dispute or the sanctioned shareholder after the price is paid.

A food manufacturer plans to buy a smaller rival. Before signing, it reviews the target's accounts, tax position, supplier contracts and pending disputes, checks the owners and directors against sanctions and adverse news, and inspects food safety records. It finds an unresolved recall claim and lowers its offer, with a price adjustment if losses exceed an agreed amount.