The concept of Due Diligence - why it is required when investing
Due Diligence for a business and investor is a procedure for obtaining objective data on the object for investment. The procedure involves a thorough analysis of the company's operations, as well as checking its financial condition and market position. Usually, Due Diligence is required for the purchase of a company or the execution of a transaction, or in the process of merging a company.
Peculiarities of the procedure
A special check provides an independent expert opinion on the functioning of the facility in which it is planned to invest. The study allows you to determine the actual value of the object and obtain data on the possible legal risks at the conclusion of the contract.
The translation of Due Diligence means ensuring good faith. The object of the study can be either a company or a plot of land, any real estate or rights. The depth of the planned study and other criteria are determined by the initiator of the performance.
This service is in demand among the persons operating in the investment market because of the growing need to obtain information about the partner while drawing up the contract. The procedure is spreading in CIS countries.
Who needs this service?
Carrying out verification is usually necessary for an investor - a person who is going to buy or invest funds in a company. When executing a large-scale contract, it is required to obtain detailed data on the facility where the money is invested, its value, and possible risks and consequences.
In addition, conducting Due Diligence is important for the company's shareholders and top managers.
When is due diligence recommended:
- The status of the company has been changed;
- The management structure has been adjusted;
- The support of sponsors has been obtained;
- The company's operations have become less efficient;
- Assets have been seized;
- Court proceedings were initiated;
- Competitiveness has declined, etc.
When performing the procedure, the correctness of the information about the financial condition of the company is checked. It assesses the extent to which the objectives have been achieved. Within the Due Diligence process the feasibility of the policy is evaluated, competitive advantages are identified, and the degree of management effectiveness is determined.
The purpose of due diligence is to reduce risks or eliminate them completely. Conducting due diligence may take anywhere from a few weeks to a year, depending on the scope of the business.
Conducting due diligence
The due diligence process consists of five stages, each of which is followed by a conclusion. During the tax due diligence, the actual financial condition of the organization is verified, and potential risks associated with tax payments are identified. Tax and accounting reports, as well as hidden debts, are checked, etc.
Performance of operational audit implies the examination of constituent documents. During the legal analysis, it is performed legal expertise of documents of title. Contracts with contractors, loan agreements, encumbrances, property rights, trademark rights, etc. are thoroughly examined.
During marketing analysis, the competitiveness of the product is evaluated. Financial assessment implies the definition of the main indicators of the company's financial position; analysis of further development of the enterprise is performed.