Have you decided to find an investor or completely sell your business? Then, we will tell further what is included in the concept of due diligence, how the procedure goes, and what actions to take to pass it successfully.
Due diligence as a mandatory stage of the investment process
The formation of new relationships between companies, the need to modernize production, develop relations with investors, and the possibility of entering international capital markets have led to the fact that the requirement for transparency of activities today is no longer a fashion but a mandatory requirement for both companies claiming leading positions in their markets and for smaller growing companies. The principle of “Know your partner” is fundamental when choosing the form of business partnership and contractual terms for implementing a project or transaction. Therefore, today’s due-diligence procedure has ceased to be a check peculiar only to the banking sector. More and more companies are applying for a comprehensive business analysis service from the point of view of financial analysts, auditors, and lawyers.
At the stage of planning an investment transaction, especially a large one, it is important for an investor who invests his funds in a company as a single property complex or acquires a real estate object to have comprehensive information about the financial position of the investment object, its reliability and creditworthiness, and business partners. Due diligence is a service that includes an assessment of investment risks, a comprehensive analysis of the company’s activities, a systematic, comprehensive audit of its economic activities and financial condition, and legal support required when buying or selling a business, a merger transaction, and concluding an important contract.
So, you will need due diligence if you or your company:
- want to sell your business or buy a ready-made one;
- intend to carry out a merger or acquisition of companies;
- intend to create a joint venture;
- are going to apply to banks or financial institutions for a loan;
- want to truthfully show a potential partner or investor your solvency and solidity;
- you want to check the reliability and solvency of your counterparty.
How does due diligence work?
The investor is ready to proceed to a detailed check after a closer acquaintance with your project. By verification, you should have a virtual data room – well-protected online storage of your company’s business-critical documents and reports. It is better to keep this database in a cloud service so that you can quickly share them with the investor and contractors.
When conducting a legal analysis of an object, specialists use information from internal sources, data provided by partners and competitors in the market, and regulations in tax, civil, and labor law. In the course of this work, the experts are faced with the following tasks:
- assess and verify the accuracy of information about the financial position in the company’s statements;
- analyze the timeliness and correctness of the delivery of accounting and tax reporting;
- check compliance with the law and regulations of all title documents;
- to analyze the accounts receivable and accounts payable reflected in the accounting and reporting to identify overdue debts;
- analyze the business plan and marketing policy of the company.
So, interested investors should consider due diligence as an obligatory stage of the investment process before making a deal to acquire shares or company assets. The procedure will allow managing risks (for example, conducting a reorganization before the transaction, refusing to purchase shares in favor of an asset transaction, etc.). In addition, the objectivity and reliability of the information presented to his attention will allow the investor to make an independent and optimal decision.