A common phenomenon in the field of investment are investments in the merger or acquisition of various kinds of business or companies. The primary task is to adequately argue the effectiveness of this type of infusion, which should be supported by complete, most reliable and absolutely objective information about the subject of investment.
How to analyze the activities of the company from all sides? Which translation has the term due diligence?
If a company acts as a potential object of financing, then it is necessary to determine its market position, the state of financial indicators, equipment with production capacities and interrelations with contractors or partners. For this purpose, a due diligence procedure is performed. Translation from English is interpreted as “due diligence”. In Russian it is pronounced as “due diligence”. This concept is interpreted in different ways. The most commonly used description of the term has been presented above.
Decoding a previously presented concept
Initially, it is worth answering the question: "Due diligence - what is it?" In fact, this is a comprehensive analysis of the company, in particular the state of its financial affairs and its market position. The information base for the analysis is the internal documentation of the company and information received from competitors.
Why is this procedure needed?
Due diligence is carried out for the following purposes:
- Verification of the authenticity of financial information and other performance indicators of the company.
- Search for reasoned evidence that justifies the implementation of measures of the developed business plan.
- Assessment of the possibility of implementing the tactical and strategic goals of the company.
- Verification of compliance of the enterprise documentation with the legislatively established rules for its design, as well as internal standards.
- Analysis of the correctness and timeliness of the formation of tax, statistical and other reports.
- Determining the competitiveness of an enterprise within its target market segment.
- Assessment of the degree of competence of the company's management in relation to the ability to implement strategic plans.
All of the above will once again answer the question: "Due diligence - what is it?" The entire list of justifications for the appropriateness of this analysis is yet another confirmation of the need and relevance of its conduct in Russian firms.
Practical use of due diligence
There is a list of situations in which the obligatory initial stage should be the given analysis technique, namely:
- merger or acquisition of a business;
- acquisition of shares or company shares;
- purchase of real estate;
- the establishment of new partners;
- provision of a loan;
- targeted financing, in particular sponsorship or gratuitous;
- other operations of a financial and commercial nature, in which it is necessary to provide true data about the object of the transaction, either about the financed company, or about the invested project to the investor, sponsor or buyer, etc.
Expediency due diligence of the company
During the implementation of this comprehensive study, a special project team, which consists of professional lawyers, appraisers, auditors, collects all kinds of information about the analyzed object and verifies the reports, especially financial.
There are several cases that are relevant for due diligence. The translation of this term has already been considered earlier, but it is worth recalling that this is an all-encompassing analysis of the authenticity of the data provided by the company.
Which business should this study be applied to?
The above facts include several companies requiring due diligence:
- The so-called "company for sowing" (Seed). Basically, they act as projects and business ideas that require investment for more in-depth research or development of trial units of goods.
- Newly made companies (Start up). Attraction of investment is necessary for the implementation of research activities, and subsequently to begin implementation.
- Companies at the initial stage (Early stage), that is, there is already an implementation of a trial batch of finished products. As a rule, they have no profit and require investment in the final stage of research work.
- Firms settled in the Expansion phase. There is a need to attract investment to develop new markets, increase production, conduct research in the field of marketing, increase production capacity and work units.
- Companies that are at the stage of "building bridges" (Bridge financing). There is a need for funding to transform the legal form, namely private enterprise into an open joint-stock company, which is trying to carry out the procedure for registering its shares on the stock exchange.
- Existing companies that attract investments for their managers to buy a ready-made business or existing production facilities (Management Buy-Out).
- Already existing companies whose managers require financing to purchase firms from the outside (Management Buy-In).
- Firms undergoing a coup (Turnaround). They need investments to strengthen their financial condition.
From these facts, it becomes clear what due diligence can give, what it is in the general sense and whether it is worth applying to a particular company.
Species aspect of the procedure under consideration
A check regarding the legality of all constituent documents and the correct formation of the authorized capital is carried out due diligence, the legal aspect of which is prevailing in this study.
This may include verification in the following areas:
- All points regarding the property aspect of the business being sold, more precisely, the availability of relevant rights. The likelihood of risks associated with its challenge by third parties.
- Legal and current legal reinforcement of transactions within the company that was put up for sale. Assessment of the possibility of claims regarding these commercial relationships.
- The legal side of labor relations with employees, in particular, the correctness of the execution of employment contracts, the procedures for accepting and dismissing, allocation of liability, etc. Checking for the risks of suing improperly dismissed employees.
- Correspondence of the company’s actions to the requirements of corporate law, namely: the legitimacy of the sale of shares or shares to other commercial entities. Assessing the admissibility of claims of shareholders and equity owners regarding violations of the relevant transactions.
What justifies the benefits of this study?
No less important is the analysis within the engineering aspect, referred to as technical due diligence.
The usefulness of this procedure is supported by the following points:
- The owner or investor receives information acquired from a professional study of the technical condition of the property being verified about defects and the existing possibility of their elimination or improvement of an acceptable state of affairs. In this case, the analysis is subject to all engineering documentation.
- There is the possibility of operating with reliable data during the relevant calculations aimed at the economic feasibility of capital investments, if repair or reconstruction of the object in question is required.
- All information obtained during the study will be useful during negotiations regarding the price of the object. It will be of a confirming nature, as it is based on professional expert opinion.
Demand for the service of this study by profiling companies
Due diligence service will help to obtain an objective opinion of a group of specialists due to their external involvement. This will save money on retraining of own employees and avoid bias in evaluating the object considered for financial injections.
The investor or owner has at his disposal comprehensive information in such areas as accounting, personnel and tax accounting, as well as legal and corporate expertise. All this will be able to organize legal due diligence.
A guideline when choosing a company specializing in this procedure
A company that carries out due diligence must meet the following criteria:
- many years of experience in the relevant field of activity;
- high rating and flattering reviews about previous procedures;
- exclusively highly qualified experts conducting a comprehensive study;
- the ability to analyze a specific investment subject;
- the principle of efficiency in the research process, achieved through the professionalism of the expert group and the standardization of legal due diligence procedures;
- the presence of close mutual cooperation of all specialists.
Are there interconnected steps in a comprehensive analysis?
This procedure can be divided into three stages:
- Remote request for all necessary documentation from the audited company or direct access to the analyzed object. In the case of the acquisition of shares or shares of a certain company, the expert group works on the spot. The rationale for this option is the fact that it is possible to quickly resolve the identified contentious issues.
- The next stage is the detailed study of the collected intra-company data. If additional information is required, it is obtained from outside, in particular from the unified state registers of legal entities or rights to real estate, or licensing authorities connect.
- At the final stage, the expert group generates a single written report on the asset, which is presented by sections on the general information of the company, the areas analyzed, possible risks and ways to most effectively eliminate them.
From the three stages indicated earlier, a detailed answer to the question can be formulated: "Due diligence - what is it?" Thus, this procedure will allow as soon as possible to get a reasoned answer about the feasibility of financial investments in the intended object. She is also able to identify ways to improve both the technical, legal and financial condition of the company.
Due diligence can be described as one of the fundamental stages of the purchase of assets, helping the investor to form a complete picture of the possible risks at the time of the appropriation of property and future crisis situations that may occur after the conclusion of the transaction. This procedure is aimed at checking the legality of all areas of activity, as well as the commercial attractiveness of a potential transaction or investment object.