Define Due Diligence

Over the years I have collected a few different definitions of what is due diligence.

From Editor’s collection…

• One who chooses not to invest based on the unremitting suspicion of glossy investment brochures.

• Informed choice.

• Trust, buy verify.

• A checklist of thinks to be done before making an investment

• Also tossed in Due Diligence is part of Know Your Customer, Public Liability, Model Audits, and Management.

• Due Diligence is Integrity Management – (Actually you either have integrity or you don’t – its not something you can manage.)

Quasi-Legal Definition  

•  “Due diligence is a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person under the particular circumstances; not measured by any absolute standard but depends on the relative facts of the special case.” In other words, to a potential acquirer, due diligence means “making sure you get what you think you are paying for.”

From Business Dictionary

•  General: Measure of prudence, responsibility, and diligence that is expected from, and ordinarily exercised by, a reasonable and prudent person under the circumstances.

• Business: Duty of a firm’s directors and officers to act prudently in evaluating associated risks in all transactions.

• Investing: Duty of the investor to gather necessary information on actual or potential risks involved in an investment.

• Negotiating: Duty of each party to confirm each other’s expectations and understandings, and to independently verify the abilities of the other to fulfill the conditions and requirements of the agreement. Also called reasonable diligence.

from Wikipedia

•  “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.”

From Webster’s – Noun

• The care that a reasonable persons exercises to avoid harm to other persons or property

• Research and analysis of a company or organization done in preparation for a business transaction.

First the errors in all of the definitions..

Due Diligence is not a noun it is a verb.  Thus, due diligence is not a duty, due diligence is an ongoing standard of care, it is not part of KYC, or even part of management.  Due Diligence is not insuring you get what you paid for that is a subjective value judgment

Correctly stated

Due Diligence is an understanding of why we make the choices we make and choosing to make those choices fully informed choices, in business and in life.

One Response

  1. Jim Grebey says:

    “Our first attraction to a business is often an attraction to the product itself. The gadget attracts us. “Wow! What a great idea! They’ll sell millions of these!” This is when we start to look beyond the product and begin to ask questions about the business that produces and sells it. We understand the value of the product. Next we also need to understand the value of the business
    behind the product. Due diligence is a voyage of discovery.” “It is a process for searching beyond the products and venturing, by analysis and assessment, through three distinct facets of the business—its financial, legal, and operations frameworks—to assess risk and discover clues for predicting the long-term sustainability of the business”. – Operations Due Diligence – An M&A Guide for Investors and Business (published by McGraw Hill)

    Clearly, due diligence is a process and therefore a verb!

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