Diligence means the necessary effort and care, and due diligence is the careful examination of a company or an upcoming transaction.
The term comes from the American practice for the sale of companies, US investor protection law, and the review of prospectuses when issuing securities. Today the term due diligence is used when preparing an acquisition or an IPO. When assessing and evaluating a company, due diligence requires the most precise examination of its reports and plans in order to be able to give investors an objectively justified, checked and therefore reliable recommendation.
It is therefore not only a question of formally and arithmetically checking the information provided by the company as in the audit of the annual financial statements; the information given is checked more closely for its material content. Business plans should be really realistic and not just show a future expectation. In addition, it is carefully checked whether the information given is complete or whether further information can be obtained.
Die Due-Diligence ist umfangreich und aufwendig. Oft werden für Teilschritte Spezialisten herangezogen. So wird die Financial Due Diligence, die Legal Due Diligence, die Management Due Diligence, die Environmental Due Diligence sowie die Insurance Due Diligence unterschieden.
The disclosure of information (disclosure) reduces the information asymmetry that exists between the well-informed seller and the less informed prospective buyer. The disclosure of the information is primarily in the interest of the prospective buyer, who can evaluate it so well. The seller sees two aspects: On the one hand, positive aspects will increase the company's valuation.
Negative facts will reduce the purchase price, but disclosing them will reduce the discount a buyer takes on the uncertainty of valuation when they have only partial insight into the company. On the other hand, the disclosure of information is critical if the prospect is a competitor who could then withdraw and change his strategy based on the information to the detriment of the company being considered for a purchase.