What is due diligence?

Due diligence is an investigation of a deal or transaction before it is finalized, according to Entrepreneur. The investigation verifies the worthiness of the transaction before the purchaser makes his final decision.

For example, if an individual is purchasing a business, then during the due diligence stage, he reviews the company's inventory, buildings, offices and furnishings, tax returns and financial statements. Other items reviewed include contracts, marketing strategies, employee organizational charts and salaries, compliance with federal and local regulations, and insurance, notes Entrepreneur. Since the potential buyer receives access to sensitive information, he is often asked to sign a nondisclosure agreement. Due diligence is performed by the buyer or investor's attorney and accountant.