Due diligence

Definition

Due diligence is the systematic investigation of a counterparty's solvency, compliance, ownership and performance record before entering or extending a relationship. In procurement it reduces continuity, fraud and sanctions risk; in M&A it informs price and warranties. The depth scales with deal value and risk.

Example

Before awarding a critical supply contract, the buyer reviews the supplier's financial statements, certifications and sanctions screening.

Why this is a business risk

Skipping or superficially conducting due diligence exposes the organisation to counterparty insolvency, sanctions violations, fraud and supply-chain disruption. A supplier that fails within months of contract award, or that turns out to be on a sanctions list, creates financial loss and potential regulatory liability for the buyer, both of which are far more costly than the diligence itself.

How to manage it

• Scale due diligence depth to contract value and strategic importance: a critical single-source supplier warrants more scrutiny than a routine purchase.
• Always run sanctions screening and check beneficial ownership for contracts above your policy threshold.
• Request financial statements and references, and verify certifications independently rather than relying solely on supplier declarations.
• Document findings and the decision rationale so the process can be evidenced if a problem arises later.
• Refresh diligence periodically for critical suppliers, not only at the start of the relationship.