Due diligence is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party or himself. The term “Due Diligence” is used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care.

In Finance, due diligence is the process of research and analysis that takes place in advance of an acquisition, investment, business partnership or bank loan in order to determine the value of the subject of the due diligence or whether there are any “skeletons in the closet”

In the banking industry, it refers to the responsibility of the bank directors and officers to act in a prudent manner in evaluating credit applications. In the securities market, it refers to the responsibility of underwriters to explain the details of new securities to interested purchasers.

Thus, Due Diligence involves investigation and evaluation of a management team’s characteristics, investment philosophy, and terms and conditions prior to committing capital. Due Diligence is undertaken in order to determine the value of the subject of the due diligence and unearth any issues or potential issues. It is expected to provide a realistic picture of how the business is performing now, and how it is likely to perform in the future.