According to experts, the need for due Diligence is growing every year, and the share of the service in the total volume of audit services is also growing. One of the reasons for the demand, a trend-forming factor, is the increase in the quality level of the procedure by Russian consulting companies.
When is DueD performed?
The study’s initiator is usually the investor, but in some cases, the persons interested in due Diligence may be the shareholders of the company or its top management. When making a major transaction, it is very important to have up-to-date information about the object of financing, its real value, and possibly the legal and tax consequences of such an acquisition.
In addition, the information obtained as a result of due diligence can be used in the preparation of the issue of own securities, the development of a mechanism for protection against a takeover by another company, or in other important business events.
But the main goal of due Diligence is not only to receive investments from the object of financing. For example, when acquiring expensive real estate, it is extremely important to ensure the legal purity of the transaction, the absence of negative consequences after investing funds, and the object’s compliance with the buyer’s goals.
What does due Diligence give?
The main goal of due Diligence of an enterprise is to minimize or eliminate existing business (economic, legal, marketing, tax) risks:
- Default by the debtor company.
- Acquisition of shares at an inflated value.
- Initiation of litigation (their adverse consequences).
- Recognition of the transaction as invalid.
- Loss of tangible assets, including the imposition of penalties on the company’s property.
- Causing damage or loss of intangible assets (goodwill), in particular the reputation of the company, and intellectual property (trademark, know-how, invention, commercial idea).
- Unfair competition, including the emergence of corporate conflicts, such as takeover and hostile takeovers.
- Political or risks of loss of administrative resources.
- Bringing to criminal, tax, or administrative liability.
- Loss or failure to obtain the necessary permits or licenses on which the implementation of the transaction or project depends.
As a rule, both parties are interested in carrying out the procedure – the investor company and the company attracting investments. It allows the investor to assess in detail the prospects of the business he is interested in and the compliance of the object with the buyer’s goals, ensuring the transaction’s legal purity and the absence of negative consequences after the acquisition. The seller confirms his good faith, allowing him to receive more good offers.
Due diligence procedure
Three groups of specialists are usually involved in the study:
- Financial analysts and appraisers. Their task is to determine the current value of the investment object and its possible range of matter for various options for using the asset in the future.
- Lawyers. The Group is responsible for conducting legal and legal due Diligence of the organization’s activities to identify potential risks for the investor associated with its acquisition.
- Auditors. Their competence includes a financial audit of the company’s activities for several reporting periods and identifying tax risks and possible ways to optimize the tax base.
The due diligence procedure consists of five independent stages, each of which an objective conclusion is eventually made.