{"id":5576,"date":"2021-08-12T08:21:51","date_gmt":"2021-08-12T13:21:51","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/starting-a-business\/what-is-due-diligence.html"},"modified":"2026-06-18T02:08:00","modified_gmt":"2026-06-18T07:08:00","slug":"what-is-due-diligence","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/what-is-due-diligence.html","title":{"rendered":"What is Due Diligence?"},"content":{"rendered":"\n<div class=\"fl-sectionWithSidebar fl-container fl-flex fl-flex-wrap fl-gap30  wp-container-core-columns-is-layout-9d6595d7 fl-sectionWithSidebar fl-container fl-flex fl-flex-wrap fl-gap30\">\n<div class=\"fl-section-main fl-page-articles fl-section-main fl-section-main-full-width\"><h1 class=\"fl-no-margin-top\">What is Due Diligence?<\/h1>\n\n<section class=\"fl-gutenberg-byline\">\n    <div class=\"fl-gutenberg-byline-content\">\n                    By <a href=\"https:\/\/www.findlaw.com\/company\/our-team\/acacia-wilson-esq\/\">Acacia Wilson, Esq.<\/a> | Legally reviewed by <a\n                href=\"https:\/\/www.findlaw.com\/company\/our-team\/catherine-hodder-esq\/\">Catherine Hodder, Esq.<\/a>\n                | Last updated\n        <time>\n                            June 18, 2026\n                    <\/time>\n    <\/div>\n\n            <div class=\"fl-gutenberg-byline-editorial-note fl-text-sm\">\n            <p>Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n        <\/div>\n    \n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-legally-reviewed\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Legally Reviewed\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>This article has been written and reviewed for legal accuracy, clarity, and style by <a href=\"https:\/\/www.findlaw.com\/company\/our-team.html\">FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with <a href=\"https:\/\/www.findlaw.com\/company\/company-history\/editorial-policy.html\">our editorial standards<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n\n    <details class=\"fl-gutenberg-byline-toggle fl-gutenberg-byline-fast-checked\">\n        <summary>\n            <i class=\"fl-gutenberg-byline-icon\" aria-hidden=\"true\"><\/i>\n            Fact-Checked\n        <\/summary>\n\n        <div class=\"fl-gutenberg-byline-toggle-content\">\n            <p><em>The last updated date refers to the last time this article was reviewed by FindLaw or one of our <a href=\"https:\/\/www.findlaw.com\/company\/our-team\/contributing-authors.html\">contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please <a href=\"https:\/\/lawyers.findlaw.com\/?fli=bylinelink\" target=\"_blank\" rel=\"noopener\">contact an attorney in your area<\/a>.<\/em><\/p>\n\n        <\/div>\n    <\/details>\n<\/section>\n\n\n    <div class=\"fl-callout-text article-blockquote\">\n        <p>Due diligence means the process of reviewing legal, financial, and tax information to assess risks and liabilities before finalizing a business transaction.<\/p>\n\n    <\/div>\n\n\n\n<div><p><span data-term-id=\"9821956\">Legal <\/span><span data-term-id=\"9821921\">due diligence<\/span> is a process that helps people make an <span data-term-id=\"9821928\">informed decision<\/span> about a <span data-term-id=\"9821951\">business transaction<\/span>. A <span data-term-id=\"9821927\">due diligence<\/span><span data-term-id=\"9821927\"> checklist<\/span> can help to make sure you cover all of the areas that are important. Buyers and sellers of <span data-term-id=\"9821923\">real estate<\/span> use the <span data-term-id=\"9821922\">due diligence<\/span><span data-term-id=\"9821922\"> process<\/span> often.<\/p>\n<p><b><i>Form your LLC with confidence.\u202f<a href=\"https:\/\/legalzoomcominc.pxf.io\/c\/4851649\/2115288\/26746?subId1=what-is-due-diligence--in-content\" rel=\"sponsored noopener\" data-cta=\"Biz LZ - LATL Callout\" data-cta-url=\"legalzoom.com\" target=\"_blank\">Our trusted partner LegalZoom has packages starting at $0 + filing fees.<\/a><\/i><\/b><\/p>\n<ul>\n<li>\n<h2>Key Takeaways:<\/h2>\n<ul>\n<li>\n<p><span data-term-id=\"9821921\">Due diligence<\/span> can help you find out about risks and <span data-term-id=\"9821934\">red flags<\/span> before you do a <span data-term-id=\"9821951\">business transaction<\/span>.<\/p>\n<\/li>\n<li>\n<p>There are different <span data-term-id=\"9821933\">types of <\/span><span data-term-id=\"9821921\">due diligence<\/span>: legal, financial, and tax.<\/p>\n<\/li>\n<li>\n<p>Reviewing documents is an important part of the <span data-term-id=\"9821922\">due diligence<\/span><span data-term-id=\"9821922\"> process<\/span>.<\/p>\n<\/li>\n<\/ul>\n<h2>Understanding <span data-term-id=\"9821921\">Due Diligence<\/span><\/h2>\n<h2>How the <span data-term-id=\"9821922\">Due Diligence<\/span><span data-term-id=\"9821922\"> Process<\/span> Works<\/h2>\n<p>You&#8217;re considering a deal, and you&#8217;ve executed a <span data-term-id=\"9821952\">letter of intent<\/span>. The <span data-term-id=\"9821952\">letter of intent<\/span> shows that you plan to move forward. What&#8217;s next? You will need to review documents. In an <span data-term-id=\"9821944\">M&amp;A deal<\/span> or <span data-term-id=\"9821960\">joint venture<\/span>, you may want to identify any liabilities or risks before proceeding. During a <span data-term-id=\"9821930\">due diligence<\/span><span data-term-id=\"9821930\"> period<\/span>, <span data-term-id=\"9821959\">acquirers<\/span> may want to review legal, tax, and <span data-term-id=\"9821965\">financial information<\/span>. The resulting <span data-term-id=\"9821953\">due diligence<\/span><span data-term-id=\"9821953\"> report<\/span> lets <span data-term-id=\"9821943\">acquiring firms<\/span> know about any <span data-term-id=\"9821934\">red flags<\/span>.<\/p>\n<h2><span data-term-id=\"9821933\">Types of <\/span><span data-term-id=\"9821921\">Due Diligence<\/span><\/h2>\n<p>With <span data-term-id=\"9821931\">mergers and acquisitions<\/span>, <span data-term-id=\"9821921\">due diligence<\/span> can help to identify risk before companies merge. What type of <span data-term-id=\"9821921\">due diligence<\/span> do you need for your <span data-term-id=\"9821951\">business transaction<\/span>? <span data-term-id=\"9821935\">Financial <\/span><span data-term-id=\"9821921\">due diligence<\/span> could help you understand the value of assets. <span data-term-id=\"9821956\">Legal <\/span><span data-term-id=\"9821921\">due diligence<\/span> looks at contracts, litigation history, and <span data-term-id=\"9821936\">intellectual property<\/span> to identify litigation risks. Tax <span data-term-id=\"9821921\">due diligence<\/span> involves reviewing past <span data-term-id=\"9821946\">tax returns<\/span> and conducting audits to confirm there are no outstanding issues.<\/p>\n<h2><span data-term-id=\"9821921\">Due Diligence<\/span>: Types and Goals<\/h2>\n<\/li>\n<\/ul>\n<h2>\u00a0<\/h2>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<tbody>\n<tr>\n<td style=\"width: 33.3333%;\"><strong>Type<\/strong><\/td>\n<td style=\"width: 33.3333%;\"><strong>Description<\/strong><\/td>\n<td style=\"width: 33.3333%;\"><strong>Goal<\/strong><\/td>\n<\/tr>\n<tr>\n<td style=\"width: 33.3333%;\"><strong>Legal<\/strong><\/td>\n<td style=\"width: 33.3333%;\">Review contracts, history of lawsuits, <span data-term-id=\"9821936\">intellectual property<\/span>, <span data-term-id=\"9821938\">zoning<\/span> laws, and perform <span data-term-id=\"9821961\">title searches<\/span> for <span data-term-id=\"9821923\">real estate<\/span>.<\/td>\n<td style=\"width: 33.3333%;\">Find undisclosed liabilities, pending litigation, or restrictive <span data-term-id=\"9821948\">covenants<\/span>.<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 33.3333%;\"><strong>Financial<\/strong><\/td>\n<td style=\"width: 33.3333%;\">Review <span data-term-id=\"9821924\">financial statements<\/span>, such as <span data-term-id=\"9821925\">cash flow<\/span> statements and <span data-term-id=\"9821932\">balance sheets<\/span>, <span data-term-id=\"9821929\">valuation<\/span> and overall financial health.<\/td>\n<td style=\"width: 33.3333%;\">Confirm income, understand debt obligations, and verify <span data-term-id=\"9821929\">valuation<\/span>.<\/td>\n<\/tr>\n<tr>\n<td style=\"width: 33.3333%;\"><strong>Tax <\/strong><\/td>\n<td style=\"width: 33.3333%;\">Review past <span data-term-id=\"9821946\">tax returns<\/span>, audits, and compliance reports in all taxable jurisdictions.<\/td>\n<td style=\"width: 33.3333%;\">Verify there are no outstanding tax liabilities or liens.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span data-term-id=\"9821934\">Red Flags<\/span> in <span data-term-id=\"9821921\">Due Diligence<\/span><\/h2>\n<p>A <span data-term-id=\"9821932\">balance sheet<\/span> can show <span data-term-id=\"9821934\">red flags<\/span>. <span data-term-id=\"9821925\">Cash flow<\/span> statements can show what the company spends and receives. <span data-term-id=\"9821946\">Tax returns<\/span> can also help you see if a <span data-term-id=\"9821926\">target company<\/span> is current with tax obligations or is in trouble. Legal documents should show a company is in good standing with the Secretary of State.<\/p>\n<h2>Commonly Asked Questions<\/h2>\n<h3><strong>Do I have to go through the <span data-term-id=\"9821922\">due diligence<\/span><span data-term-id=\"9821922\"> process<\/span>?<\/strong><\/h3>\n<p>There is no law that states that you have to do <span data-term-id=\"9821921\">due diligence<\/span>, but it could help you make an <span data-term-id=\"9821928\">informed decision<\/span>. You might decide not to go through with the deal. You might want to change the <span data-term-id=\"9821964\">purchase price<\/span>. No matter the results, it could help to have the information before you sign a <span data-term-id=\"9821955\">purchase agreement<\/span>.<\/p>\n<h3><strong>Does it cost money to do <span data-term-id=\"9821921\">due diligence<\/span>?<\/strong><\/h3>\n<p>Yes. Many people who go through the <span data-term-id=\"9821922\">due diligence<\/span><span data-term-id=\"9821922\"> process<\/span> hire someone to help them. If you get an auditor or accountant for a financial or tax review, you have to cover the cost of services. <span data-term-id=\"9821956\">Legal <\/span><span data-term-id=\"9821921\">due diligence<\/span> can be <span data-term-id=\"9821949\">time-consuming<\/span> and expensive, but it could be worth it to avoid lawsuits.<\/p>\n<h3><strong>Where can I get help with <span data-term-id=\"9821921\">due diligence<\/span>?<\/strong><\/h3>\n<p>If you are considering buying a business, FindLaw has a <a href=\"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/buying-a-business-due-diligence-checklist.html\">Buying a Business: <span data-term-id=\"9821927\">Due Diligence<\/span><span data-term-id=\"9821927\"> Checklist<\/span><\/a>. A business attorney is also an excellent resource for entrepreneurs.<\/p>\n<h2>Consider Speaking with an Attorney<\/h2>\n<p>The best way to answer your legal questions about <span data-term-id=\"9821921\">due diligence<\/span> is by\u00a0<a href=\"https:\/\/lawyers.findlaw.com\/business-organizations\/?fli=dcta\" target=\"_blank\" rel=\"noopener\"><u>speaking with an experienced small business<\/u><\/a>\u00a0attorney. Consider a service like FindLaw when seeking legal practitioners. Let FindLaw\u2019s database of dedicated lawyers put you in touch with someone today.<\/p><\/div>\n\n\n<div class=\"was-this-helpful\">\n    <div\n            class=\"was-this-helpful__question-container\"\n            aria-labelledby=\"was-this-helpful__question\"\n            role=\"group\"\n    >\n        <span\n                id=\"was-this-helpful__question\"\n                class=\"was-this-helpful__question fl-text-lg-bold\"\n        >Was this helpful?<\/span>\n        <button\n                class=\"was-this-helpful__button fl-text-sm\"\n                aria-label=\"Yes\"\n                value=\"yes\"\n        >\n            <span class=\"was-this-helpful__button-text fl-text-bold\">Yes<\/span>\n            <i class=\"was-this-helpful__button-icon\">\n                <svg width=\"22\" height=\"22\" viewBox=\"0 0 22 22\" fill=\"none\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\">\n                    <g id=\"thumbs-up\" clip-path=\"url(#clip0_604_3418)\">\n                        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