Due Diligence is an investigation of a counter-party or assets. It helps to get an idea about the object of investment and to identify potential business risks: economic, marketing, legal, and tax. It determines the competitive advantages, evaluates the effectiveness of the management system, and allows you to obtain independent information about the financial position of the company.
At different stages of the company's development:
|Stage||Stage description||Why due diligence is needed|
|1.||Seed||A business idea at the initial stage of implementation.||To make a decision about a project's development, and whether or not to start financing it.|
|2.||Start Up||When the project is launched, but the company does not have a market history.||To conduct research before the start of sales.|
|3.||Early||The company already has a finished product, but it is not marketed it yet.||To prepare everything for the realization of the product on the market.|
|4.||Expansion||The company is working but wants to scale the business.||To increase production, carry out marketing research, find new ways to sell finished products.|
|5.||Bridge financing||The company is aimed to transform from a private company into an OJSC.||To register the assets on the stock exchange.|
|6.||Management Buy Out and Buy In||The company plans to raise funds or to purchase the business from venture funds.||To show the objective financial standing of the company to potential investors.|
|7.||Turnaround||The company is having difficulties.||To stabilize the financial position of the company.|
The procedure may be needed in any of these situations:
These are just a few examples of when you might need Due Diligence; however, there are many more situations.
Due Diligence helps you to reduce entrepreneurial risks, or completely exclude them. You can determine when your counter-parties don't fulfill their obligations, or if shares are being sold at an inflated price. Other reasons for such an investigation:
The main purpose of the Due Diligence is to determine whether to invest funds or not.
Investors, shareholders, top managers. The first and second are interested in conducting the procedure to obtain detailed information about investment objects. Due Diligence helps top managers to develop a strategy to protect against a hostile takeover or to prepare for a security issue.
Documents, company management, market and capital information, patents and trademarks. All of this helps to determine corporate and tax risks, administrative responsibility risks.
Specialists assess the internal corporate papers, financial and technical reports, the results of market research. Also, they inspect insurance policies, as well as tangible and intangible assets. Special attention is given to contracts: purchase/sale contracts, supply agreements, and loan agreements.
The financial information, as well as the owners of the company are checked. Additionally, court cases are checked for, and investigated if there are any.
Capital, products, lenders and encumbrances are checked. Market research is performed.
Patents, trademarks, and property titles, and the property that belongs to the company are assessed. Additionally, the equipment and financial position of the company's branches can be evaluated and analyzed.
It comes from proven and independent sources. Representatives of the invested company are not interested in providing the requested information and documents, because such data may reduce the company's price. To get the most objective results, the company which conducts Due Diligence uses the following methods:
A company can perform Due Diligence on its own or engage outside experts. In the first case, it will save money, while in the second, it's going to receive objective investigation results. The advantages and disadvantages of various options of due diligence conducting in detail:
|Method||Pros («+»)||Cons («-»)|
|Involving third-party specialists.||
If the company is small, it can be done on its own. To investigate large companies, the only sure solution is to involve outside specialists.
The inspection parts do not depend on each other; therefore, they can be carried out alongside.
These experts determine the market value of the business, analyze the structure of the company's incomes and expenses. Additionally, they verify the accounts and study the accounting and management accounting systems. If necessary, they carry out an inventory count to compare the actual data with the accounting data.
These specialists analyze whether the risks and marketing policy is successful or not. They also evaluate market conditions. They determine the position of the company in the market and compare the business with the competitive companies. Based on the audit results, they form a list of development recommendations for the company under the current market conditions.
These experts check tax and accounting reports, analyze the financial investments and account receivable reports, as well as inspect counter-parties. They take the data for the last three years and determine the feasibility and legitimacy of schemes that the company uses for tax optimization.
These professionals assess the management and employees of the company, analyze the organizational and legal form, as well as general development prospects. If the organizational structure and the level of corporate governance do not provide proper effectiveness, they offer recommendations to remedy the situation.
These specialists determine the legality of the company's operational structure, assess the prosecution risks, and examine all legal documents. Within the framework of this part of investigation, they conduct a legal verification of the share's ownership of other firms and the legality of property rights registration of for real estate.
Important! It is not necessary to go through all the stages. The scope of investigation is determined during the preliminary consultation of the customer and the performer.
Based on the audit results, experts form three independent reports for the customer. The reports form can be deployed with interim conclusions of each specialist, or in the form of brief recommendations on business process optimization.