Due diligence is what is done in order to check that everything is as it appears. In an investment context it usually refers to the checks carried out before a major transaction. For example:
- by a bidder before making a takeover bid.
- by an underwriter prior to an IPO or other issue
- by a venture capitalist before making an investment.
Due diligence often implies gaining greater access to a company's accounts than is available in the published accounts. This is one reason why, when possible, an agreed takeover is preferable to a hostile takeover - the target company is under no obligation to allow special access to its accounts, but may be persuaded to.
This is also a good reason for investors to be cautious about any company that has received a takeover approach that has failed to materialise after the would be bidder started due diligence. The bidder may have found problems that are not evident in publicly available information.