The due diligence procedure is a series of measures to form an accurate idea of the investment object. At the same time, not only a legal entity but also rights of claim, a land plot, or a real estate object can act as such an object.
Why and who needs DueD
In the implementation of due diligence, as a rule, an investor is interested, that is, one who will buy or invest in a particular company. When making a transaction, especially a large one, it is essential to have comprehensive information about the object of financing, its actual value, and possibly legal and tax consequences.
The number of persons interested in conducting due diligence, in addition to external investors, includes the shareholders of the company, as well as its top managers. The indicators obtained as a result of the audit may subsequently help prepare the issue of securities or develop a mechanism for protection against a hostile takeover.
Due diligence procedure
The process of a comprehensive DueD usually consists of five independent blocks of work, for each of which an objective conclusion is given.
Tax due diligence
The task of this stage is to analyze the financial and economic activities of the enterprise over the past three years. This is necessary to determine the company’s actual financial condition at the current moment and identify potential tax risks. An analysis of tax and accounting reports, the organization’s main activities, and fixed assets is carried out, including an inventory of property, financial investments, receivables, payment of mandatory payments and the identification of hidden accounts payable, verification of counterparties. Based on the results, a report is generated containing a description of potential tax risks and recommendations for minimizing them.
The task of this stage is to examine the company’s constituent documents, aimed at determining the ownership structure of the organization, the scope of property and non-property rights of each owner (shareholders), possible risks, and proposals made to reduce them. During the corporate structure analysis, the correctness of the registration of the issue of shares, the principal transactions with them, and the completeness of payments to shareholders are checked. The result of this stage is also an independent report.
Legal due diligence
It involves a legal examination of all title documents for each asset to identify their type and volume, the risk of disposal, and the formation of recommendations for the protection of assets. Experts check contracts with counterparties, loan agreements, real estate objects for the presence of encumbrances, title documents for real estate, and trademark documents. State bodies and contractors also assess the risks of being held liable. As part of this analysis, a comprehensive check is carried out on the bases of bailiffs. The customer receives a report listing possible legal risks and recommendations for minimizing them.
An assessment of the market situation, the main trends, and the product from the point of view of competitiveness in the market is given, and the risks of marketing policy are analyzed, which is reflected in the report.
Financial assessment due diligence
At this stage, critical indicators of the company’s financial condition are determined and analyzed to assess the prospects for acquiring a business and its subsequent development. The analysis includes an assessment of the company’s market value, the calculation of financial stability, solvency ratios, and business activity. The final report contains all the indicators and coefficients, and the appraiser’s conclusion is given.