Overview: Due diligence is a common bit of business and financial jargon that also is frequently used in the legal profession. In general, it simply means thorough fact-finding and data gathering, often followed by detailed analysis.
Since this phrase tends to have an especially authoritative connotation, it often is used to impress the hearer. Indeed, because this phrase is not a part of common everyday speech, those who use it in conversation with members of the general public clearly are trying to inflate their own importance and stature.
Investment Banking: When investment bankers are engaged by a client company to structure an offering of debt or equity or to look into a possible merger or acquisition deal, they inevitably will begin by conducting what they call "due diligence." As noted above, this is their preferred phrase for data gathering and analysis.
Consulting: Likewise, when management consultants are engaged by a client to study a given business problem, question or opportunity, they also are likely to call their period of fact finding and analysis an exercise in "due diligence."
Money Management: When money managers and securities analysts look closely into an investment opportunity or a company's financial statements, they also are apt to categorize this as an exercise in "due diligence." Stock research is fundamentally a matter of due diligence.
Legal and Compliance: Every state has laws governing unclaimed property, including the responsibility of parties holding such property to locate the rightful owners and to restore such property to them.
In the financial services industry, this often involves unclaimed or inactive accounts, such as at banks, securities brokerage firms and investment companies (the latter including, but not limited to, mutual fund companies). Banks, in addition, may be in possession of unclaimed property in the form of the contents of safe deposit boxes for which rental fees have not been paid.
Compliance departments are responsible for setting rules and procedures that ensure fulfillment of their firms' legal obligations in this area. Rules vary by state regarding the issuance of due diligence letters, which inform the owner of the record that his or her assets are about to be escheated to the state and that he or she needs to act within a certain amount of time to prevent this occurrence. Escheat is the process by which a state takes possession of unclaimed property, holding it in trust for the rightful owners, should they ever come forward to make a claim. If they do not after a designated period of time, the property effectively reverts to the state.
Due to diligence letters, of necessity, are sent to the last known address of the property owner. State laws will vary regarding the obligation of the property holder to conduct an investigation into possible subsequent address changes, or into whether the property owner is deceased, and, if so, who his or her legal heirs may be and where they might be found.
The quality of Due Diligence: More time, effort and money invested in due diligence, unfortunately, do not guarantee a better result. In 1985-86, Touche Ross had a team of at least 6 consultants working virtually around the clock, 7 days a week, for at least 6 months in support of a famously flawed leveraged buyout (LBO) of the Macy's department store chain. The billings on this engagement easily exceeded $1 million (roughly $2.5 million in 2015 dollars).
Macy's went private in July 1986, and only 4 years later it was in bankruptcy, unable to meet the interest payments on the loans that had facilitated the LBO. The sophisticated financial models and projections that the Touche Ross team had developed and tweaked ad infinitum proved to be fatally flawed, leading the buyout group (led by Macy's executives) to overpay vastly for the acquisition.