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George Mason University Antonin Scalia Law School

Due Diligence

What Is Due Diligence?

According to Investopedia, due diligence is an investigation or audit of a potential investment or product to confirm all facts, that might include the review of financial records. Due diligence refers to the research done before entering into an agreement or a financial transaction with another party.

Investors perform due diligence before buying a security from a company. Due diligence can also refer to the investigation a seller performs on a buyer that might include whether the buyer has adequate resources to complete the purchase.

What Information May Be Included in a Due Diligence Report?

  • Company Profile
    • Basic background information—including history, operations, reputation, number of employees, contact information, ticker symbol, names of top executives, top competitors, overview of financials (minutes, books, etc.), and any recent news stories and company press releases.
  • Industry Profile
    • To help understand the industry of the company for which you are conducting due diligence.
  • Financial Statements
    • Directly from the company or from a third-party financial analyst.
  • Annual Reports
    • Report produced for shareholders containing information about operations, overview of financials, officers and directors, etc. Distinguished from the 10K filed with the SEC.
  • SEC Filings (aka “EDGAR” filings)
    • 10-K: Annual report filed with the government that includes a company’s contact information, tax ID (“EIN”), a detailed description of the company’s operations and financial information; a summary of the firm’s competitive and regulatory climate; a description of the company’s facilities; an overview of the main legal proceedings in which the company is involved; and a list of the company’s significant subsidiaries.
    • 10-Q: Quarterly filing that updates the information contained in the 10-K. In addition to quarterly financial updates, you will want to take a look at legal proceedings and risk factors listed in the 10-Q.
    • 8-K: “Breaking news” filing, required whenever an “unscheduled material event” has taken place (e.g., a change in top management, a takeover bid, merger plan, or the initiation of major legal action against the company).
    • Proxy Statement (DEF 14A): Notifies shareholders when and where the annual meeting will take place. Will also list any individual or institution which holds more than 5 percent of the company’s stock, along with executive and director compensation, and director biographies.