The term "Due Diligence" can take on a different meaning depending on how it's used, whether it's meant in the legal sense, in business or specific to manufacturing. It's underlying meaning, is as the term literally implies: An attempt is made to validate something based on its unique characteristics.
In Manufacturing
Many manufacturing companies are required by authorities the report on various aspects of their businesses, such as the impact its processes make on the environment. They are required to complete a so-called "due diligence report" on its findings and submit it to the Environmental Protection Agency for review. A similar report is required of such things as waste water that is the result of a public utility making energy and carbon emissions by other companies. In these cases, the company itself is reviewing and reporting on its operation.
In Investing
Say a venture capital firm is looking to invest in a going concern. It will spend time at the company and do due diligence on its reports, employees, management as well as other aspects of the company before investing in it. It will do due diligence instead of just relying on the statements made and given to it by the company.
In Lending
This is a similar "due diligence" that is done by venture capitalists, but in this case, the lending institution is looking at the company from the standpoint of it being able to repay the loan, even under the most severe circumstances. The lender might not physically come to the company to "kick the tires," but it will require it to complete additional reports in needs to make the loan.
In A Corporate Buyout
If another company is interested in buying another company, it probably will approach "due diligence" in a slightly different way. Besides being interested in proving the value of the business to be acquired, it is also interested in learning what redundancy there might be. For example, if a company is in a like business and it has an accounting staff, the acquiring company can forecast the savings resulting from absorbing it into its own department.
Due Diligence is No Panacea
Not withstanding the length to which due diligence is used to assess a process or a potential investment, many things can go wrong. For example, an acquiring company might do due diligence and is satisfied with what it is about to purchase. Later, the company it acquired is sued for selling a defective product. All the due diligence in the world cannot forecast this. Due diligence is simply a snap shot of a situation.
