Due diligence is becoming more and more general in the business environment since the completeness and reliability of information about objects, its adequate and comprehensive assessment, is one of the components of the success of ongoing business transactions. So, what is the essence of this procedure?
Due diligence: a complete check of your counterparty
Interacting and cooperating with business partners is necessary to develop in the modern world. If a company owner wants to deepen the conversation with a prospective buyer, he allows him to see all relevant company documents. This detailed examination of the purchase object is referred to as due diligence. It is a set of measures to obtain the most objective information about anything. In simple terms, the due diligence service includes the study and evaluation of an object in terms of its financial, legal, and other features. Due diligence aims to gain as much information as possible about the company’s opportunities and risks. In addition, organizations need to find out if these potential business partners have:
- history of poor performance;
- litigation and fraud;
- reputational problems.
The result of the due diligence influences the purchase decision, the pricing, and the drafting of the contract.
So, the optimal examination of the purity of the transaction entails benefits both for the investor (allows him to save resources in the form of money) and for experts (defines clear boundaries of the issues under consideration, allowing them to save time and provide professional services to a larger number of interested investors).
What areas of due diligence can be applied in practice?
In practice, due diligence business due diligence consists of a combination of several audit areas:
- Operational due diligence
The corporate structure is analyzed, the constituent documents are examined, and the effectiveness of the organizational structure, the level of corporate governance, the operation of management systems, and personnel management are assessed. The volume of owners’ rights is determined, and the correctness of registration of the issue of securities is checked. The history and development prospects of the organization are evaluated. It includes the analysis of the business organization, including the history of the development of the enterprise, its structure and management, personnel, sales, strategy, strengths and weaknesses, and factors hindering further growth.
- Legal due diligence
As part of the Due Diligence procedure, the company’s activities are checked for compliance with corporate, civil, labor, and environmental law legislation. Examining title documents by types of assets is carried out to determine the risks of disposal, contracts for authenticity, significant conditions, and compliance with the law. The property is checked for encumbrances. The legality of the company’s management scheme is being checked, etc.
- Financial due diligence
The main financial indicators in dynamics are calculated: liquidity and solvency ratios. The market value of the business is determined. An audit of reporting, inventory, and valuation of property, accounts payable and receivable, etc., is carried out.
- Tax due diligence
Real and potential tax risks are identified by analyzing accounting and tax reporting. In addition, an investigation is underway to determine whether the company may have used illegal tax optimization schemes.
So, implementing the entire range of activities within the framework of the Due Diligence service may take several weeks to a year. The deadline for completing the task depends on the structure and scale of the business.