Due diligence requires an investigation of a business in connection with any business transactions or possible business transactions. It is often carried out by someone looking to buy a business or someone investing in a business. This is known as buy-side diligence. Another form is conducted by a seller (or its agent) to identify the business’s potential problems when planning for sale of the business. This is known as a sell-side diligence. The seller in a transaction has an advantage because he or she has more knowledge about the business and may not necessarily feel compelled to make additional inquiries about the daily business operations. Because of this, buy-side due diligence comes with more consequences.
Due diligence is not simply an endeavor aimed at understanding risks associated with a business. Businesses are usually bought because there is money to be made. A buyer that is buying a business that is not doing so well will want to assess the potential and unused capacity in order to understand how to produce synergies and potentialities. The discovery of these potentialities may lead a buyer to outbid rivals or choose not to share the value of synergies. Understanding risks is critical in the purchase of a business, but buyers gain a lot from diligently surveying the potential for business growth and development.