What is the concept of “due diligence” in investment transactions?

The concept of "due diligence" in investment transactions refers to the thorough investigation or audit of a potential investment opportunity. This process involves carefully examining various aspects such as financial statements, market conditions, legal considerations, and operational metrics to assess the potential risks and rewards associated with the investment. Conducting due diligence allows investors to make informed decisions and helps to uncover any issues that may affect the viability of the investment.

This comprehensive evaluation is crucial for identifying any red flags and for validating the assumptions made about the investment's expected performance. By performing due diligence, investors aim to ensure that they fully understand what they are getting into before committing their capital, thus minimizing the likelihood of unpleasant surprises after the investment has been made.