Due Diligence

  1. What is Due Diligence
  2. When it's conducted
  3. Why due diligence
  4. Due diligence participants
  5. What is investigated
  6. Where does the data for due diligence come from
  7. Ways to conduct
  8. Stages of due diligence
  9. Documentation of the results

What is due diligence

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.

When it's conducted

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:

  • Decrease in the Business Effectiveness: A decline in profits, financial position has become worse, issues with finished products selling and acquiring new partners.
  • Change in the Management Structure: A new top manager in the company or rearrangements without involving the manager from outside.
  • Mergers or Acquisitions: When company "A" has become a part of company "B" or they merged. In this case, Due Diligence serves as the instrument which defines the current position.
  • Lending: When a company needs a loan to work out new directions or scale up the business, Due Diligence helps the creditor to determine the appropriateness of providing funds.
  • Litigation: Company "A" is suing the company "B," or in case of intra-corporate disassembly, Due Diligence helps identify the perpetrators and gather evidence.
  • Intellectual Property Loss: Patent disputes and other issues which require a confirmation of authorship.
  • Tax Offenses: The inspection company found violations in accounting or in tax reports. Thanks to Due Diligence, you can confirm your innocence or prove someone's guilt.
  • Labor Disputes: Internal proceedings with employees. The data from the Due Diligence report will help to determine objective claims and to resolve the conflict.
  • Special-Purpose Financing: Sponsors' financial assistance. As in the case with obtaining a loan, first and foremost, it's necessary to determine the current financial position of the company.
  • Partnership Establishment: Business expansion and new partners attraction. Due Diligence will increase your chances of successful cooperation.
  • Asset Freezing: When it's impossible to conclude new deals, perform settlement with counter-parties. In order to unfreeze accounts, you need to prove the legality of the company. Due Diligence reports are perfectly suitable for this.
  • Buying / selling a business: A deal between participants of launched projects. Potentially new owners will be able to determine the objective financial position of the company, while sellers will be able to show the success of the business and sell the product for a higher profit.

These are just a few examples of when you might need Due Diligence; however, there are many more situations.

Why due diligence

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:

  1. Analyze the feasibility of the businesses policy.
  2. Check the reliability of the company's financial position.
  3. Find competitive advantages.
  4. Evaluate the management effectiveness.
  5. Determine the degree of the plan's implementation (current and strategic).

The main purpose of the Due Diligence is to determine whether to invest funds or not.

Due diligence participants

Who orders it:

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.

Who performs it:

  • Auditors. The people who analyze the internal control system, check the company's activities for a specific reporting period, and determine the tax risks. They give recommendations on tax optimization.
  • Evaluators. The people who determine the value of the company, compare the obtained results with the price of similar enterprises on the market. They also assess the risks that depend on the purpose of the purchase.
  • Lawyers. The people who verify the constituent documents, analyze the implementation of contracts, evaluate the decision taken at the shareholders' meetings.

What is Investigated

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.

External sources

Capital, products, lenders and encumbrances are checked. Market research is performed.

Additional Documentation

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.

Where does the data for due diligence come from

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:

  1. Researches and analysis of public information.
  2. Gathers data from competitor companies.
  3. Initiates tax audit (the information received from the reports).
  4. Conducts an inventory count.
  5. Requests information from different authorities.
  6. Interviews the company's employees to obtain insider information.

Ways to conduct

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 («-»)
  1. Saving money.
  2. A clear understanding of business, the ability to see the situation "from the inside."
  3. The high speed of the procedure (no time wasted on "getting to the bottom.")
  1. Biased results.
  2. Distraction of company's specialists from their actual jobs.
Involving third-party specialists.
  1. Objective results.
  2. A large list of recommendations from different professionals.
  3. Accurate results (because the investigation is carried out by narrow specialists).
  1. Expensive.
  2. Slow (because the executors need time to thoroughly study the company).

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.

Stages of due diligence

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.

Documentation of the Results

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.

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