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How is due diligence defined during a business transaction?

New Jersey business people are encouraged to use due diligence when purchasing assets and new organizations. However, some may wonder exactly what due diligence really means. According to BusinessDictionary.com, due diligence involves exercising the same level of responsibility and care that a reasonable person would exercise given the same situation.

In the business world, due diligence has to take another step. Not only must the corporate decision-makers for the organization act reasonably but they must also evaluate any risks associated with completing the proposed business transaction. Doing so can involve evaluating a great deal of information about the entity subject to sale or purchase.

When completing its due diligence review, a corporation may need to look at the foundational documents of its prospective acquisition. Those documents can include articles of incorporation, corporate bylaws, certificates of good standing and many others. They can also include financial documents that provide a complete picture of the acquisition's economic health, whether it be good or bad.

Due diligence can also include reviewing all of the tangible and intangible assets that a prospective acquisition carries. Real estate, physical items as well as intellectual property can all be considered assets of an acquisition. Liabilities of the acquisition, such as outstanding bills and contracts, should also be evaluated.

The mentioned items of review only scratch the surface of what a corporation should review when exercising due diligence over a potential acquisition. This discussion is not comprehensive and should not be considered legal advice. It may, however, give business owners a place to start when endeavoring to exercise due diligence over a possible acquisition by their corporate structure.

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