Due Diligence

Due diligence is the process of examining the financial underpinnings of a corporation as one of the first steps in a pending merger, equity investment or large-scale IT purchase, with the goal of understanding the risks associated with the deal. Issues that could be reviewed include corporate capitalization, material agreements, litigation history, public filings, intellectual property and IT systems

Due diligence entails taking all the "reasonable steps" to ensure that both buyer and seller get what they expect, not a lot of other things that you did not count on or expect. The process involves everything from reading the fine print in corporate legal and financial documents such as equity vesting plans and patents to interviewing customers, corporate officers and key developers. It helps to identify potential risks and red flags.

It is recommended to examine public filings, especially the 8-K, which the SEC requires public companies to file when an auditor resigns. The document must state the reason for the departure. "The reason an auditor resigns is very often due to legitimate disagreements. An 8-K filed by auditors that quit could be interpreted as a red flag.