What is Due Diligence?
Due Diligence refers to the practice of investigating or auditing a prospective investment in order to confirm facts. The audit includes analyzing different aspects of the investment like reviewing financial records, going over all legal documentation, etc. Due diligence is effectively the care any reasonable party should take before entering into any legal agreement or financial transaction.
Sometimes, due diligence also refers to the audit a seller would perform on a potential buyer. In this scenario, the seller would be looking for anything that would hinder the buyer's ability to make payments or anything that would have a negative effect on the seller after the transaction is completed. It is not unlike the vetting a lender does of borrowers applying for loans.