What Does Due Diligence Mean?
Due diligence is the process that a potential buyer conducts to assess the merits of an acquisition. Financial due diligence is usually focused on assessing the quality of earnings, quality of the assets of a business, potential undisclosed liabilities, and matters that might increase the risk of the investment.
Reverse or seller due diligence is when a seller performs an analysis of a potential buyer to assess their ability to close the transaction and if they are suitable partners/investor/buyers.
Divestopedia Explains Due Diligence
During financial due diligence, the buyer will vet the assumptions that have been used to project the target's proforma earnings which determine the valuation and purchase price.
In addition to financial due diligence, the buyer will review operations to determine if there are any potential revenue or cost synergies available which have not been modeled in the valuation. Such operational synergies include price increases to the existing product or service, rationalization of redundant costs, and new markets that may be accessed once the transaction closes.
The due diligence performed can be different if an asset or share transaction is being completed. The due diligence completed for a share transaction is more comprehensive as all liabilities of the target - accrued or not accrued - are purchased at the risk of the buyer. When an asset transaction is completed, the liabilities of the target stay in the seller's company selling the assets.