Financial advisory

What is due diligence?

Marianne Ingermann
By:
Marianne Ingermann
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Contents

Due diligence or a due diligence assessment is an analysis of a company or organisation in preparation for a purchase or sales transaction. The aim of a due diligence assessment is to confirm the accuracy and correctness of the information presented in the purchase or sales transaction.

In a transaction, it is important for the buyer to understand the risks related to the company being purchased and to be able to foresee the future on the basis of historical evidence, and also to assess the sustainability of the business in the coming years. The scope of a due diligence audit may vary depending on the nature and objectives of the transaction being considered. The three main areas of due diligence are: tax, finance and legal, but it is also possible to conduct a thorough overview of, for instance, the areas of management, marketing, production and IT in order to understand the object of the transaction as a whole.

What does due diligence consist of?

A due diligence assessment consists of several parts, each of which provides an answer to different questions related to the transaction. The output of a due diligence includes answers to, for example, the following questions:

  • What are the long-term strategic plans for the object of the transaction?
  • How are the processes of the object of transaction organised and what is the impact of internal policies on the financial standing and results and the overall reliability of reporting?
  • What is the current capital need of the object of the transaction in order to ensure the sustainability of activity?
  • What are the outlooks of the object of the transaction and are the forecasts of the seller believable and reasonable?
  • What risks may have an impact on the object of the transaction due to the former activities of the seller and what possible risks may arise for the buyer after the transaction has been made?
  • What factors have a significant effect on the estimated value of the object of the transaction?
  • For what purpose have the former owners decided to sell the company?

If the buyer plans to merge the object of the transaction with an existing business, a due diligence audit will also provide an overview of the strategic suitability of and the synergies between the two companies. In addition to all of the above, a due diligence assessment will also provide an overview of the company’s intellectual property user rights, technologies and production capability, legal and environmental issues, etc. The output of a due diligence assessment largely depends on the buyer: whether it is a strategic buyer, a financial investor or anyone else.

Why is due diligence important for buyers?

Due diligence is important as it aids investors in making transactions. Just like the saying goes: ‘don’t buy a pig in a poke’! A due diligence assessment is like an investment to hedge the risks of your investments. A due diligence assessment increases the buyer’s assurance that the transaction to be performed will be successful. You cannot be a specialist in every field and therefore ordering a due diligence from specialists offers an economy of time, as you don’t need to drown yourself for days or even weeks in complex reports that may not even bring final clarity. In a due diligence assessment, specialists in their field can highlight the most important findings as well as the options for dealing with potential risks.

Why is due diligence important for sellers?

A due diligence audit is not only important from the point of view of the buyer, because it may turn out for the seller in the course of the assessment that the initially desired selling price was too low. In order to ensure that the actual value of the company has been reached in the course of an assessment, it is also useful for the buyer to order a corporate due diligence assessment. This way, you can make sure that you haven’t overlooked important assets or that the assets of the company have not been affected by single large expenses. An important part of due diligence assessments includes our main findings of aspects of activities (red flags), and recommendations on how to diversify such risks. Thanks to solutions, due diligence offers company owners an easier and faster opportunity to make improvements before arriving at a sales transaction.

What should you take into account in choosing your due diligence partner?

In choosing your due diligence partner, it is important that you choose someone in your sales process who has extensive previous experience, as a larger base of experience will help cope with emergency situations. The challenges a company faces while awaiting a potential purchase or sales transaction may vary; therefore, the diversity of the specialists involved is also important when choosing a due diligence partner. Trust is of key importance, and it is achieved following on from previous successful jobs, valuable specialists and an approach that takes into account the individual needs of each customer.

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