In finance, due diligence may refer to the process of research and analysis that takes place in advance of an investment, takeover, or business partnership. The potential investor generally uses in-house resources or hires a consulting firm, that specializes in due diligence and corporate investigations, to investigate the background of the company and principals of the target company.
A due diligence assignment generally includes reviewing press and SEC filings, checking for regulatory and licensing problems, identifying liens and judgments, and uncovering civil and criminal litigation matters. Sophisticated investigators will also search for conflicts of interest, insider trading and press and public records that identify problems that may have occurred under the principal's "watch."
The investigative results may be prepared in a "due diligence report" that the investor uses to understand risks involved in the investment. For example, if negative information is uncovered on a principal of the target company, the investor may put pressure on the target firm to replace that individual. In addition to identifying risks and implications of an investment, due diligence may include data on a company's solvency and assets.