Due Diligence is very important in the process of investigation and evaluation a business or investment opportunity. Due diligence refers to exercising maximum care in a given transaction. It is important to understand all the relevant aspects of the present, past and future of the business or company to be acquired. It is a homework for any investor before starting a transaction.
Due diligence is most oftenly used in the process of buying a business. The buyer needs to understand target company’s financial situations, legal obligations, customer records and subsequences which may arise of those. Due diligence is also important issue of determining a price to offer for a business.
Due diligence results in a due diligence report.
Who conducts due diligence?
There are many participants involved into a due diligence project. Depending on the type of a business and the goals a due diligence is to achieve, the following persons and companies can conduct due diligence: co-investors, corporate staff, accountants, attorneys, investment bankers, loan officers. It is a common practice to hire a consulting company for due diligence, to have an independent party in the process. Target company management usually helps the conductors to obtain the necessary due diligence information, but it is not a good practice to fully rely on the management, as they are the Sellers at the end, and might want to hide some facts.
When is Due Diligence Conducted?
When a business or investment opportunity arises, the 1st stage – data collection and evaluation is being started. Due diligence can be conducted at any stage of negotiations, or even prior to negotiations for an investor to understand if he or she might be interested in this particular business, however, it is most commonly finished before signing an M&A contract.
If you do not do your due diligence homework, you may end up buying not exactly what you intended to buy, or some unexpected obligations may arise, and you may suffer additional costs, or even will have to bankrupt the company bought. Due diligence report may be costly, as it involves services of Certified Public Accountants and sometimes attorneys and lawyers for legal due diligence, but the risks of not conducting due diligence are much higher.
What is Due Diligence Report
Due diligence report is a result of weeks or month of consultants work, with the actual financial statement of a company mentioned and all the evaluated risks enumerated. It is an independent picture of how everything goes in the company, and it helps the investor to make his mind whether to buy such company or not, as well as it can influence the price indication.
Most commonly a due diligence report can be split into the following categories:
1. Company information.
CEO name, Board members, ownership details, formation history
2. Financial information
Current turnover and past returns
3. Legal history
Judgements present or pending, licences and permissions, other legal issues
Due diligence report can also incluse HR issues, technical issues, plitical risk indication, etc., depending on the company type and the risks the buyier is trying to evaluate. Therefore it is very important to prepare a comprehensive due diligence check list or due diligence request list, according to which your consultants will be investigating and preparing a due diligence report.