Due diligence - what is it? Conducting due diligence

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Mergers and acquisitions of various businesses or companies are common in the investment industry. The primary task is to adequately justify the effectiveness of this type of injection, which should be supported by complete, most reliable and absolutely objective information about the subject of investment.

How to analyze the company's activities from all sides? What is the translation of the term due diligence?

If a company acts as a potential object of financing, then it is required to determine its market position, the state of financial indicators, the equipment of production facilities and the relationship with counterparties or partners. For this purpose, a due diligence procedure is carried out. Translation from English is interpreted as "due diligence". In Russian, it is pronounced as "due diligence". This concept is interpreted in different ways. The most commonly used description of the term has been provided above.

Deciphering the previously presented concept

Initially, it is worth answering the question:"Due diligence - what is it?" In fact, this is a comprehensive analysis of the activities of the company, in particular the state of its financial affairs and its market position. The information base for the analysis is the company's internal documentation and information received from competitors.

Why is this procedure necessary?

Due diligence is carried out for the following purposes:

1. Checking the authenticity of information about finances and other performance indicators of the company.
2. Search for reasoned evidence that justifies the implementation of the activities of the developed business plan.
3. Evaluation of the possibility of implementing the tactical and strategic goals of the company.
4. Checking the compliance of the company's documentation with the legally established rules for its design, as well as internal standards.
5. Analysis of the correctness and timeliness of the formation of tax, statistical and other reports.
6. Determining the competitiveness of an enterprise within its target market segment.
7. Assessing the degree of competence of the company's management in relation to the ability to implement strategic plans.

All of the above will once again answer the question: "Due diligence - what is it?" The entire list of justification for the expediency of this analysis is another confirmation of the need and relevance of its implementation in Russian companies.

Practical applicationdue diligence procedures

There is a list of situations in which this analysis technique should be carried out as an obligatory initial stage, namely:

• merger or acquisition of a business;
• acquisition of shares or shares of the company;
• buying real estate;
• establishment of new partners;
• provision of a loan;
• targeted funding, in particular sponsorship or gratuitous;
• other transactions of a financial and commercial nature, in which it is necessary to provide true data about the object of the transaction, either about the financed company, or about the invested project to the investor, sponsor or buyer, etc.

Expediency of the company's due diligence

During the implementation of this comprehensive study, a special project team, which consists of professional lawyers, appraisers, auditors, collects all kinds of information about the analyzed object and checks reports, especially financial ones.

There are several cases relevant for due diligence. The translation of this term has already been discussed earlier, but it is useful to recall that this is a comprehensive analysis of the authenticity of the data provided by the company.

Which business should definitely apply this study?

The above facts include several firms requiring due diligence:

1. The so-called "seed companies". Basically theyact as projects and business ideas that require investment for more in-depth research or development of trial units of goods.
2. Newly minted firms (Start up). Attraction of capital investments is necessary for the implementation of research activities, and subsequently for the start of implementation.
3. Companies that are at the initial stage (Early stage), that is, there is already a trial batch of finished products. As a rule, they do not have a profit and require capital investments in the final stage of research and development.
4. Firms established in the Expansion stage. There is a need to attract investment to develop new markets, increase production, conduct research in the field of marketing, increase production capacity and work units.
5. Companies that are at the stage of "building bridges" (Bridge financing). There is a need for funding for the transformation of the legal form, namely private entrepreneurship into an open joint-stock company, which is trying to implement the procedure for registering its shares on the stock exchange.
6. Operating firms that attract investments for their managers to buy a ready-made business or existing production facilities (Management Buy-Out).
7. Existing companies whose managers require funding to buy firms from outside (Management Buy-In).
8. Turnaround firms. They need capital investments to strengthen their financial condition.

From the above facts, it becomes clear what due diligence can give, what it is in the general sense and whether it should be applied to a particular company.

View aspect of the procedure in question

Checking the legality of all constituent documents and the correctness of the formation of the authorized capital is carried out by due diligence, the legal aspect of which is prevailing in this study.

This includes checking in the following areas:

1. All points regarding the property aspect of the business being sold, more precisely, the availability of appropriate rights. The likelihood of risks associated with its contestation by third parties.
2. Legitimate and valid legal support for completed transactions within the company that was put up for sale. Assessing the possibility of claims arising from these commercial relationships.
3. The legal side of labor relations with employees, in particular, the correct execution of employment contracts, the procedure for hiring and firing, the distribution of liability, etc. Checking for the presence of risks of filing claims by improperly dismissed employees.
4. Compliance of the company's actions with the requirements of corporate law, namely: the legality of the sale of shares or shares to other commercial structures. Assessment of the admissibility of claims of shareholders and co-owners regarding the violation of the relevant transactions.

What justifies the profitability of thisresearch?

Equally important is the analysis within the engineering aspect, referred to as technical due diligence.

The usefulness of this procedure is supported by the following points:

1. The owner or investor receives information, acquired from a professional study of the technical condition of the property being checked, about the presence of defects and the existing possibility of their elimination or improvement of the acceptable state of affairs. In this case, all engineering documentation is subjected to analysis.
2. It is possible to operate with reliable data when carrying out appropriate calculations aimed at the economic feasibility of capital investments, if repair or reconstruction of the object in question is required.
3. All the information obtained during the study will definitely come in handy during negotiations regarding the price of the object. It will be confirmatory in nature, as it is based on the professional opinion of experts.

Demand for the service of conducting this study by profiling companies

Due diligence service will help you get an objective opinion of a group of specialists by involving them from outside. This will save money on the retraining of our own employees and avoid bias in the assessment of the object considered for financial injections.

An investor or owner has at his disposal comprehensive information in such areas as accounting, personnel and tax accounting, as well aslegal and corporate expertise. All this can be organized by legal due diligence.

Landmark when choosing a company specializing in this procedure

A company that performs due diligence must meet the following criteria:

• presence of many years of experience in the relevant field of activity;
• high rating and flattering reviews of previous procedures;
• exceptionally highly qualified experts carrying out comprehensive research;
• the ability to analyze a specific investment subject;
• the principle of efficiency in the research process, achieved through the professionalism of the expert group and the standardization of the legal due diligence procedure;
• presence of close mutual cooperation of all specialists.

Are there interrelated stages of complex analysis?

This procedure can be divided into three stages:

1. Remote request for all necessary documentation from the audited company or direct visit to the analyzed object. In the case of the acquisition of shares or shares of a certain company, an expert group works on site. The rationale for this option is the fact that it is possible to quickly resolve the identified disputes.
2. The next stage is a detailed study of the collected intra-company data. If additional information is required, then they are obtained from outside, in particular from the unified state registers of legal entities or rights to real estate, or they are connectedlicensing authorities.
3. At the final stage, the expert group generates a single written report on the asset, which is presented with sections on the general information of the company, areas analyzed, possible risks and ways to most effectively eliminate them.

From the three stages mentioned earlier, it is possible to formulate a detailed answer to the question: "Due diligence - what is it?" Thus, this procedure will allow in the shortest possible time to receive a reasoned answer about the expediency of financial investments in the intended object. It is also able to identify ways to improve both the technical, legal and financial condition of the company.

Due diligence can be described as one of the fundamental steps in the purchase of assets, helping the investor to form a complete picture of the possible risks at the time of the assignment of property and future crises that may arise after the conclusion of the transaction. This procedure is aimed at verifying the legality of all activities, as well as the commercial attractiveness of a potential transaction or investment object.