“Due diligence investigation” is a phrase that varies in meaning among different business organizations and industries.

From the perspective of a venture capitalist or a private equity investment manager, it’s about assessing the business model, conducting market research and talking to the market.

For an accountant, it may be analyzing the books and records.

From an investigator’s perspective, a due diligence investigation is utilized to assess the character, integrity and reputation of potential business partner(s) or key player(s) in a venture before the client enters into a substantial financial relationship.

What is a due diligence investigation?

A due diligence investigation is conducted to assess the qualifications and track records of the people involved in the deal, to identify potential inconsistencies, misrepresentations, omissions or controversies in their backgrounds.

When is a due diligence investigation performed?

These investigations are commonly performed prior to transactions such as a merger or acquisition, formation of a business partnership or strategic partnership, or a significant investment or financing arrangement.

Who requests a due diligence investigation?

Due diligence investigations are typically conducted on behalf of small and medium-size businesses, large corporations, investment banks, private equity firms or other investors. In many cases, the investigation is initiated by a legal team involved with the deal in order to protect the integrity of the information.

What is included in a due diligence investigation?

Information that is typically covered in a due diligence investigation includes the following:

  • Personal and professional history, which includes work history, board memberships and nonprofit affiliations
  • Historical news media research on the individuals and businesses with which they have been affiliated
  • Details of civil litigation and criminal case history, including on-site court research and retrieval, where applicable
  • Regulatory records, professional licenses and government compliance checks
  • Financial history, which includes personal assets, judgments, liens, bankruptcies and U.S. Tax Court cases
  • Corporate affiliations, sex offender registries, driving history records and political contribution records
  • Credit history (with consent)

In addition to the above, a due diligence investigation can include interviews with references, sources or relevant parties.

What kind of information is found in a due diligence investigation?

Some of the more common issues that are revealed in a due diligence investigation include the following:

  • Misrepresentations of employment history or falsified degree information
  • Financial troubles, including bankruptcies, tax liens and foreclosures
  • Accusations in lawsuits, such as harassment or fraud
  • Regulatory issues
  • Past criminal trouble, including drunk driving
  • History of litigiousness
  • Undisclosed corporate affiliations, government scrutiny or a trail of failed companies

Why conduct a due diligence investigation?

In today’s business world, information is power. In the end, the purpose of conducting a due diligence investigation is to gather as much intelligence and information as possible to help you make a more informed decision.

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3 replies
  1. Jason A.
    Jason A. says:

    Had a banker tell me just today that they don’t hire professional investigators to do due diligence investigations because they “spend enough time with the client on the front end.”

    I just smiled.

    Poor guy.

  2. NITA
    NITA says:

    Anytime you are working with a new company or contractor, you should be doing your due diligence and investigating their financial history, business relationship history and their market values.

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