What is a Due Diligence Investigation?

The higher the stakes the more informed you need to be which is when you need a Due Diligence Investigation.

By Carla Rodriguez | Jan. 25, 2024 | 5 min. read

The importance of conducting a background check on a business is to be informed about the entity you are going into business with. This is when Due Diligence comes into play.

What is a Due Diligence Investigation?

Due diligence is defined as an investigation, audit, or review of a business/person done before engaging in a merger or partnership. By conducting a review of the business and its individuals, usually the top executives or owners, you can mitigate potential legal issues, financial concerns, and other risk factors associated with such a big commitment.

A background check is only one aspect of a due diligence process on a business but there are many purposes for conducting one:

Partnerships and Joint Ventures:

It is important to audit the financial reports and contracts of a business you must also scrutinize the credibility of the person you are going into business with. Make sure the owners whose company you have an interest in aren’t disbarred or have criminal charges against them.

Merger and Acquisitions:

Before engaging in a merger, asses the qualifications and professional and even personal history of all important executives. Before an IPO every aspect of a company must be reviewed, that includes the individuals associated with it. One bad apple and the whole thing could be rotten.

Commercial lending:

Before making sizable loans to another business, conduct a due diligence background check that can provide you with facts about the individual you are going into business with.

Executive level hires:

Due diligence in this case would include verifying a candidate’s qualifications, and work history but would dive deeper into their personal life, involvements, past business ventures, and even public opinion of the individual.

Letters of Intent

An LOI is a mostly non-binding agreement between two parties that lays out all the details about the potential acquisition. It outlines company A and B, and the purchasing/merger agreements they have discussed. Following the LOI comes the due diligence process, during which the buyer will examine and confirm that everything they know about the company is in fact true and on legal standards. Depending on what is found during the due diligence process the terms of purchase can then be negotiated. This is very similar to the inspection phase of buying a home. Same as you would get an appraisal on a house before you buy it to confirm it is worth the price you are prepared to pay for it, the same holds true for investing in a business.

What is Typically Included in a Due Diligence Investigation?

The goal of a Due Diligence Investigation is to write off any hidden liabilities about a business. It’s hoping for the best but preparing for the worst, which is a requirement when the stakes are this high. It can be done for a business or a high-level executive you want more information on before hiring or partnering with.

Here are all the different aspects gathered during due diligence:

  1. Social Media Search: this offers a search of multiple areas of the internet such as social media, meta-search engines, and business/sports enthusiast sites.
  2.  Employment status: if an employee is active or inactive in a company
  3. Hobbies: can be derived from social media or internet searches. Finds the interests of the person and what they spend their time doing.
  4.  Activity level/lifestyle: is the person active in their community? Are they involved in any organizations?
  5. Address history: all the addresses associated with this person/entity.
  6. Contact information: all contact information including phone numbers, email addresses, etc.
  7. Criminal and Civil records: The best criminal and civil record searches scope at least 10 years.
  8. Vehicle registration: all vehicles registered to this person’s name or business.
  9. Business registrations: all the businesses reported to the address in question or corporations/LLCs that they are affiliated with.
  10. Property deeds/assessments: all property deeds or assessments affiliated with a person or entity.
  11. Company status: what status does the company have whether that is a corporation or LLC and if it is active in that state.
  12. Professional licensing: any licenses owned by this person such as a certified property appraiser or Board-Certified Doctor.

Are full credit history reports included in due diligence?

A full credit report history can be advantageous information to know about the business or individual you are investing in. This type of report highlights the number of trade and negative accounts associated with them. However, it is a state requirement that a signed authorization be provided prior to accessing any credit reports.

Background Check vs Due Diligence?

A background check is essentially a simpler version of a Due Diligence Investigation. The BC is typically used by employers during onboarding as a way of confirming the person’s prior experience is accurate and they haven’t been convicted in the past for example. Whereas a due diligence investigation is extensive, it covers all aspects of the subject or entity.

When might you need a background check?

  • Pre-employment screening
  • Landlord/Tenant
  • Applying to medical or law school


Get a Full Report

In conclusion, conducting a business background check, especially through a comprehensive Due Diligence Investigation, is crucial for informed decision-making during a potential partnership, or M&A. Due diligence involves a thorough review of a business and its key individuals to mitigate potential legal, financial, and other risks associated with mergers, partnerships, or investments. The process includes scrutinizing financial reports, assessing the credibility of individuals, and exploring various aspects such as social media presence, employment status, criminal records, and more. Letters of Intent (LOIs) set the stage for due diligence, allowing buyers to confirm the accuracy of information before finalizing agreements. While a full credit history report can provide valuable insights, obtaining it requires proper authorization due to legal requirements. Ultimately, due diligence is a proactive measure to uncover hidden liabilities and ensure a well-informed and secure business engagement.