Due diligence - what is it? Conducting due diligence

A common phenomenon in the field of investment is the investment in the merger or takeover of various businesses or companies. The primary task is to adequately argue the effectiveness of this kind of injections, 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? What is the term due diligence?

If the company acts as a potential financing object, then it is required to determine its market position, the state of financial indicators, the availability of production capacities and the relationship with counterparties or partners. For this purpose, due diligence is carried out. Translation from English is interpreted as "due diligence". In Russian it is pronounced as "due diligence". This concept is treated differently. The most frequently used description of the term was presented above.

Decoding of the previously presented concept

Initially it is worth answering the question: "Due diligence - what is it?" In fact, this is a comprehensive analysis of the firm's activities, in particular the state of its financial affairs and the market position it occupies. The information base for the analysis is the company's internal documentation and information received from competitors.

Why is this procedure necessary?

Due diligence is carried out for the following purposes:

1. Verification of the authenticity of financial information and other indicators of the company's performance.
2. Search for reasoned evidence, which is the rationale for implementing the activities of the developed business plan.
3. Evaluation of the feasibility of implementing the company's tactical and strategic goals.
4. Verification of the compliance of the enterprise documentation with the legally established rules for its execution, as well as internal standards.
5. Analysis of the correctness and timeliness of the formation of tax, statistical and other reports.
6. Determining the competitiveness of an enterprise within its target market segment.
7. Evaluation of the degree of competence of the company's management with respect to the ability to implement strategic plans.

All of the above will allow us to answer the question: "Due diligence - what is it?" The entire list of reasons for the expediency of this analysis is another confirmation of the necessity and relevance of its conduct in Russian firms.

Practical application of due diligence procedure

There is a list of situations in which the required initial step should be the given method of analysis, namely:

• Merger or acquisition of business;
• Acquisition of shares or shares of the company;
• Purchase of real estate;
• The establishment of newcomers;
• Provision of a loan;
• Targeted financing, in particular sponsorship or gratuitous;
• Other financial and commercial transactions in which it is necessary to provide genuine data about the object of the transaction, either about the company being financed, or about the invested project to the investor, sponsor or buyer, etc.

Feasibility of due diligence of the company

In the course of this comprehensive study, an ad hoc project team, which consists of professional lawyers, appraisers, auditors, collects all kinds of information about the analyzed object and verifies the reporting, especially financial.

There are several cases that are relevant for due diligence. The translation of this term has already been considered earlier, but it will be useful to recall that this is a comprehensive analysis of the authenticity of the data provided by the company.

Which business should this research be used for?

To the above facts can be attributed several firms that require due diligence:

1. So-called "companies for sowing" (Seed). Basically, they act as projects and business ideas that require investment for more in-depth research or development of trial units.
2. Newly-minted companies (Start up). The attraction of investment is necessary for the implementation of research and development, and subsequently for the implementation.
3. Companies that are in the early stage, that is already there is the implementation of a trial lot of finished products. As a rule, they do not have profit and require capital investments in the final stage of research.
4. Firms that have settled in the Expansion phase. There is a need to attract investment to develop new markets, increase production, carry out research in marketing, increase production capacity and work units.
5. Companies that are at the stage of "bridging" (Bridge financing). There is a need for financing to transform the legal form of business, namely private enterprise into an open joint-stock company, which tries to implement the procedure for registering its shares on the stock exchange.
6. Operating firms that attract investments for purchase by their managers of a ready business or operating productions (Management Buy-Out).
7. Already existing companies, managers of which require financing for the purchase of firms from outside (Management Buy-In).
8. Firms at the turnaround stage. They need investments to strengthen their financial condition.

From the listed facts it becomes clear that it can give due diligence, what is it in general understanding and whether it is worth applying it to a particular firm.

Species aspect of the procedure under consideration

Verification of the legality of all the constituent documents and the correctness of the formation of the authorized capital produces due diligence, the legal aspect of which in this study is prevailing.

This includes testing in the following areas:

1. All the points concerning the property aspect of the business being sold, more precisely, the existence of the corresponding rights. The likelihood of risks arising from its challenge by third parties.
2. Legal and valid legal reinforcement of the completed transactions inside the company, which was put up for sale. Assessment of the possibility of claims arising from these commercial relations.
3. The legal aspect of labor relations with employees, in particular the correctness of the execution of employment contracts, the procedure for admission and dismissal, the allocation of liability, etc. Check for risks of filing claims of employees who have been dismissed improperly.
4. Correspondence of firm actions to requirements of the corporate legislation, namely: legitimacy of sale of shares or shares to other commercial structures. Assessment of the admissibility of claims of shareholders and equity owners regarding violation of relevant transactions.

How is the feasibility of this study justified?

Equally important is the analysis in the engineering aspect, referred to as technical due diligence.

The usefulness of this procedure is supported by the following points:

1. The owner or investor receives information obtained from a professional study of the technical condition of the property being inspected, the presence of defects and the existing possibility of eliminating them or improving the acceptable state of affairs. At the same time, all engineering documentation is subject to analysis.
2. It is possible to operate with reliable data when making appropriate calculations aimed at the economic feasibility of investment, if repair or reconstruction of the object in question is required.
3. All information obtained during the research is necessarily useful during negotiations regarding the price of the object. It will have a confirmatory character, as it is based on professional expert opinion.

The demand for the service of conducting this research by the profiling companies

Due diligence service will help to get an objective opinion of a group of specialists due to their involvement from outside. This will save money for the retraining of their own employees and avoid bias of the assessment of the object considered for financial injections.

The investor or the owner has at his disposal complex information on such areas as accounting, personnel and tax accounting, as well as legal and corporate expertise. All this can organize legal due diligence.

Landmark in choosing a firm that specializes in this procedure

A company that performs due diligence must meet the following criteria:

• The existence of many years of experience in the relevant field of activity;
• High rating and flattering reviews of previous procedures;
• Exceptionally highly qualified experts conducting a comprehensive study;
• The possibility of analyzing a specific investment item;
• The principle of efficiency in the process of research, achieved due to the professionalism of the expert group and the standardization of the procedure for due diligence;
• Presence of close mutual cooperation of all specialists.

Are there any interrelated stages of complex analysis?

This procedure can be divided into three stages:

1. Remote inquiry of all necessary documentation from the company under inspection 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 site. The rationale for this option is the fact of the possibility of prompt settlement of the disputed issues.
2. The next stage is a detailed study of the collected in-house data. If additional information is required, they are received from outside, in particular from unified state registers of legal entities or rights to immovable property, or are connected by licensing authorities.
3. At the final stage, the expert group forms a single written report on the asset, which is presented by sections on general information of the firm, analyzed areas, possible risks and ways of their most effective elimination.

Of the three stages mentioned earlier, you can formulate a detailed answer to the question: "Due diligence - what is it?" Thus, this procedure will make it possible to obtain a reasoned response in the shortest possible time about the appropriateness of financial investments in the targeted facility. Also, it is 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 asset purchase, helping the investor to form a complete picture of the possible risks at the time of 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 activities, as well as the commercial attractiveness of a potential transaction or investment object.