Due diligence is the process by which confidential legal and financial information is exchanged after significant review and appraisal by the parties to a merger, acquisition or substantial asset transfer. In other words, it is the analysis, investigation and professional assessment the financial institution should take before entering into an agreement or a transaction with another party and requires continuous efforts to ensure all financial records and relevant information are analyzed and verified. It should enable the relevant parties to understand fully the business of the target company and to identify and address any material areas of concern.
All businesses involved in acquisition or mergers as buyers or sellers must ensure that all financial information exchanged are verified and accurate, not only to prevent the buyers from paying more than the purchase price (or in the seller's case, receiving less than the asking price), but also to ensure that their governance and risk management objectives are fulfilled.
The followings are the four basic areas of concern that can give assurance as to the operational and other viability of the target company.