What does the term due diligence refer to in transactions?

The term due diligence specifically refers to the process of assessing potential risks associated with a transaction or investment. This thorough investigation involves examining all relevant aspects of the deal, including financial records, legal issues, and operational processes to ensure that a buyer or investor fully understands what they are getting into. In the context of business transactions, conducting due diligence helps identify any potential issues that could affect the value or success of the deal, allowing the parties involved to make informed decisions.

Regular law compliance, while important, focuses more on adhering to existing laws and regulations rather than scrutinizing specific transactional risks. General market research involves gathering information about the overall market environment but does not delve into the specific details of a transaction. Contract negotiation is a critical part of the transaction process, but it follows the due diligence phase, which lays the groundwork for negotiating terms based on informed insights gathered during the assessment.