what is due diligence?

I am considering a small investment in a certain company and have been tol;d that I should carry out a due diligence test. What exactly does this mean and how d I go abouit it?

Thanks
15:31 Wed 14th Mar 2012
 
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It's a process where you go through the information you have about the company, and ask a few more questions, to make sure that you are actually getting what you pay for.

Most accountants will have standard questions to send to the company, which they should answer.

If, after doing that, any of the information turns out to be misleading, you will have a claim against the officers of the company to compensate you for any loss you suffer.
Due diligence is to check what they claim on their accounts and selling documents is as is.

It's usually done by folk with accountancy qualifications, legal (as to the validity of their contracts to customers, banks etc) and commercial - for example, I am qualified in doing DD...... what often happens is that parameters are often set as to the material effect of contracts on the whole deal - what do I mean by that is that not every contract or asset/liability needs to be screened, only those that will impact on the deal/future of the business - so apply the 80-20 rule for example, 20% of the customers often account for some 80% of the business......the degree of due diligence is set by the buyers to the nature of the business you are looking to take over, the risks involved. and your own satisfaction.
Better answer than mine ^
Due Diligence is a check to see if everything the company is telling you is true.
eg. Check the income for the last 3 years.
Check that all tax requirements have been fulfilled.
Check suppliers and customers for balance discrepancies ( monies owed, outstanding bills, cash in hand).
There's a bit of a checklist here, http://www.meritusven...ets/pdf/diligence.pdf , but is a bit extreme.
Do your research on the net. What are people saying about the company.
Your answer is fine, JJ, many DDs are done just by the lawyers or accountants - I woudl advise on commercal DD for if the Co can easily pull the eyes over you as to quality of their commercial base, the client pipeline and their strategy/marketing going forward. Get this wrong and bugger the financial and legal!
Question Author
Thanks for all your help and assistance, I thought it was probably something along those lines, I will request a company annual statement and start from there, maybe get a company house report on them as well.
There are many reasons for conducting due diligence, including the following:

Confirmation that the business is what it appears to be;
Identify potential "deal killer" defects in the target and avoid a bad business transaction;
Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions; and
Verification that the transaction complies with investment or acquisition criteria.

"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or 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.
I cannot add to the excelent answers, however if at a later date, you find something wrong and then seek legal redress, you may have to prove Due Dilligence. i.e when you made the invstment the company was a safe investment.

For this reason you should get it done by a professional.

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