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Due diligence refers to the investigating effort made by an individual to gather all relevant facts and information that can influence his decision to enter into a transaction or not. Exercising due diligence is not a privilege but an unsaid duty of every party to the transaction. For instance, while purchasing a food item, a buyer must act with due diligence by checking the expiry date, the price, the packaging condition, etc. before paying for the product. It is not the duty of the seller to ask every buyer everytime to check the necessary details. M&A due diligence helps individuals avoid legal hassles due to insufficient knowledge of important details.
Due diligence is integral to business ethics. It is exercised in a simple over-the-counter transaction or a complicated merger and acquisition transaction. For instance, while acquiring a company, the buyer must do thorough research of the credentials of the company, its market valuation, status of accounts receivables, position in the debt market, past performance, etc.
Another area where an individual needs due diligence is while investing funds in a company. The individual should study the previous financial reports to analyze the company's performance. He should check the company background, its promoters, general reputation, and return to the existing shareholders.
Dealing in real estate is a risky business. One of the highest numbers of frauds takes place in this area. A buyer or a seller must investigate the authenticity of the other party. They should also ensure that the property title is clear.
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