What Does “Due Diligence” Mean in a Contract?
The investigation and verification process conducted before a business transaction, particularly mergers, acquisitions, and investments.
Detailed Explanation
Due diligence involves reviewing financial records, contracts, legal compliance, intellectual property, employment matters, and other aspects of a business. It's the buyer/investor's opportunity to verify what they're getting.
Due diligence typically occurs under an NDA and letter of intent. Findings may affect price, terms, or whether the deal proceeds. Representations made by the seller become particularly important.
Example in a Contract
“Buyer shall have 45 days following execution of this Letter of Intent to conduct due diligence. Seller shall provide reasonable access to records, personnel, and facilities. Buyer may terminate this Agreement if due diligence reveals material adverse conditions.”
Why It Matters
Due diligence protects you from buying problems you didn't know about. Skipping or shortening due diligence increases risk. Pay attention to what you're promised versus what you verify—representations may be your only recourse for undisclosed issues.
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