Finance: What is Due Diligence?

What is due diligence? Basically, it's... doing your research. You're preparing to make an investment or purchase, and you want to make sure there are no hidden surprises about the company, property or asset you're interested in.

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Transcript

00:25

it. The phrase derives from the notion of a bill being owed i.e. it was due. So for a

00:31

buyer being prudent doing their due diligence is a must and as you'd guess

00:36

every dalliance of a diligence is different. But let's walk through an[woman reading paper]

00:39

example. Forest Lawns, finest installers of funeral acreage in the world, wants to

00:45

buy gnomes sweet gnome, finest maker of clay gnomes. The combination on paper

00:50

seems fabulous and known sweet gnomes is phenomenally profitable. On just ten

00:55

million dollars of sales they have fifteen million dollars of profits. How

00:59

can that happen? Well Forest lawns is a billion dollar

01:02

mega corporation and begins its due diligence to buy gnomes for a hundred [man holding gnome outside of business]

01:06

million bucks in cash. They inspect the books and a number of numbers well don't

01:10

add up. There appear to be zero selling costs and lots of revenues seem to

01:15

appear out of nowhere. Oddly a ton of revenues come in from

01:18

PayPal and eBay as well. Something is just off. Luckily one of Forrest Lawn's

01:23

chief investigators watched this video and had the wherewithal to post up a web

01:28

cam over the Gnome Sweet Gnome factory at night. To everyone's astonishment they

01:34

witnessed the gnomes coming to life out of clay at night, escaping the factory [gnome with knife walking around]

01:39

and then mugging people at knifepoint. Wow, close call that could have been a PR

01:43

nightmare. Much better to by Gnome Sweet Gnome's competitor, When in Gnome. Where

01:48

their product you know doesn't break the law or threaten civilian lives. If Forest

01:52

Lawn hadn't done their due diligence they wouldn't have been privy to that [two women in office]

01:56

vital piece of information they uncovered. So yeah, that's why you need to

02:00

do your due diligence. Because you never know when you're gonna encounter

02:04

thieving garden decorations or uh anything else a company doesn't want you

02:09

to know about. [gnome attack]