What does “due diligence” involve in business transactions?

Due diligence involves conducting a comprehensive appraisal of a business's financial status and operations to ensure that all relevant facts are considered before finalizing a transaction. This process includes analyzing financial statements, evaluating operational practices, understanding liabilities, and assessing potential risks that could affect future performance. By thoroughly investigating these aspects, parties can make informed decisions and avoid potential pitfalls associated with the transaction, such as undisclosed debts or legal issues.

In contrast, a superficial review of company operations wouldn't provide the necessary depth and understanding that due diligence aims for, while taking a risk without verifying information disregards the fundamental principle of due diligence. Accepting verbal assurances from the seller alone does not constitute due diligence because it fails to verify claims with documented evidence and proper investigation. A comprehensive approach is crucial for informed decision-making in business transactions.