due diligence reviews

Do You Need Due Diligence Reviews

A corporate transaction not only harbors great potential but also considerable risks. Thus, detailed investigation and transparent presentation of the transaction object represent the indispensable ground for the success of the project. In this material, we will analyze the essence of due diligence reviews.

Risk assessment: what data do you need for due diligence?

Currently, the process of assessing and compiling an objective view of the investment object (due diligence) is a widespread practice. The main emphasis during due diligence is on financial reporting, basic tangible/intangible assets, market research.

A due diligence review facilitates decision-making through structured processing of information, offers the purchaser support in the negotiation process, and defines measures and consolidation steps. In this way, the expectations placed in the transaction can be systematically realized and integration problems after the acquisition can be avoided. The report not only serves as a basis for decision-making and a roadmap for the implementation of the transaction but is also a regular prerequisite for successful financing.

During due diligence review, the value of the company is examined from all conceivable perspectives. These include in particular the following:

  • sales and profits;
  • market situation;
  • location potential;
  • competitor analysis;
  • employee contracts;
  • tax situation;
  • holdings and companies;
  • production conditions;
  • partnerships.

The due diligence check is suitable for all types of companies, from small businesses to medium-sized companies and corporations. It is not only suitable as a means of company valuation in the course of succession. Even if participation or mergers are planned, it is advisable to rule out risks in this way as far as possible.

What is the importance of diligence?

Due diligence review is the backbone of any potential deal. Whereas two decades ago the procedure was almost entirely limited to analyzing financial performance, today it covers all aspects of a company’s activities that are at least slightly significant, including its strategy, operating performance, marketing and sales, finance, management structure, and personnel policy.

From the buyer’s point of view, due diligence addresses the biggest risk, information asymmetry. The target company always has much better information, and buyers rarely have enough time to study their target.

The investigation of the benefits and obligations of the proposed transaction is carried out by analyzing all aspects of the past, present, and projected future of the acquired business and identifying any possible risks. The procedure begins from the moment when the buyer is just starting to plan a possible purchase of an investment object. The study of the company’s activities begins the search for any information about the company, as a rule, through official sources (Internet sites, press publications). Search, tracking, and analysis of information are carried out to determine the value of the company and interest in its acquisition.

Besides, the assessment presents some challenges. This is not the least due to the large amount of data collected and the high complexity of the test. Careful planning in advance increases the chances of a coordinated process within the framework of all rules. For example, data protection regulations play an important role in the course of the audit: if the inner values of the company are examined closely, it can become a challenge to protect personal data following the GDPR at the same time. Thus, most companies used virtual data rooms to secure well-organized due diligence procedures.

Usually, the buyer engages consultants and experts to carry out the procedure. As a minimum, the due diligence team should include appraisal, legal and financial staff. It may also include economists, engineers, security specialists.