What does the term 'due diligence' refer to in a business context?

The term 'due diligence' in a business context refers to the investigation and evaluation process that occurs before engaging in a business transaction, such as a merger, acquisition, or investment. This thorough assessment is conducted to ensure that all relevant information about the business is understood, which includes financial records, legal matters, contracts, and overall business health. The purpose of due diligence is to identify potential risks, liabilities, or any unforeseen issues that could affect the transaction's success. By performing due diligence, parties can make informed decisions and negotiate terms based on accurate and comprehensive data. This practice is essential in minimizing risks and ensuring that all parties are fully aware of what the transaction entails.