Due Diligence: definition and purpose
Definition
Due Diligence, a term that we often hear when it comes to acquisitions or sales of assets, but what does this term mean? Due Diligence is a term derived from Anglo-Saxon law that literally means 'due diligence' to underline the care and confidentiality with which it must be carried out.
Today, the word due diligence is used to identify the investigative process put in place to analyze the value and condition of a company, a detailed analysis of the company and its reputation in order to determine the opportunity for an investment, a merger, an acquisition or any business relationship.
Purpose of carrying out Due Diligence
But what is the objective of carrying out Due Diligence in the context of an acquisition or sale of a small or medium-sized company?
The objective of due diligence is to evaluate the appropriateness and convenience of the transaction, determine the fair value of the company and ascertain whether or not there are critical elements capable of compromising the successful outcome of the negotiation.
For this reason, the field of investigation of due diligence is very wide and takes into account all the information relating to the company subject to the acquisition, with particular reference to the following aspects:
- the corporate and organizational structure
- the business and the reference market
- guarantees and contractual conditions
- commercial strategies
- management and administrative procedures
- economic-financial data
- tax and legal aspects
- potential risks
Due Diligence: timing and various types
Timing of the Due Diligence process
Many people wonder what the average length of Due Diligence is. The truth is that the average duration of a due diligence is very variable as it depends on the amount of information to be analyzed and the level of depth of the verification and analysis activities, as well as on the difficulties encountered by those who carry out this activity in finding the necessary data.
Generally, for small or medium-sized businesses, the duration of Due Diligence is equal to a period inclusive between 3 and 16 weeks (for larger and more complex operations).
Types of Due Diligence
The most common types of Due Diligence, which are sometimes integrated together, are the following:
- Commercial Due Diligence: it is a detailed analysis relating to the commercial aspects of the company and evaluates the organizational structure, market position, characteristics and commercial potential of the company.
- Accounting and Tax Due Diligence: analyzes the company's accounting and fiscal situation, through the analysis of the financial statements and the income statement, the assessment of their compliance with civil and tax regulations and their drafting carried out according to correct accounting principles, the assessment of the regularity of the accounting books and VAT books, tax returns and any assessments carried out by the tax authorities.
- Operational Due Diligence: This part reviews the efficiency and effectiveness of the company's operations. Business processes, supply chains, relationships with suppliers and customers, as well as issues related to personnel and human resources are evaluated.
- Legal Due Diligence: its objective is to process and evaluate the main information relating to active and passive subjective legal situations (rights, obligations, burdens, etc.) of which the target entity is the owner and to detect any critical issues.
- Real Estate Due Diligence: consists of evaluating the condition of an asset, property or real estate, before a potential transfer of ownership.
- Financial Due Diligence addresses the company's financial analysis in greater detail, focusing on revenues and profit margins. It will deepen any financial indebtedness and the adjustments that may have been made in order to bring out a better financial situation than it actually could be. The analysis of all assets and liabilities, in addition to the study of working capital, capitalizations, investments and cash flow, will allow us to have an overall picture of the company's financial situation.
Conclusion
In conclusion, Due Diligence is an essential and delicate process when it comes to buying a company. It's the crucial step that allows you to dig deep and get a clear view of what you're about to buy.
However, it is also a complex process that requires experience and expertise. So remember that although you can do a lot of research yourself, it's always wise to involve experts in this field. A legal advisor specializing in corporate acquisitions, an accountant, and a financial advisor can help you navigate the complexities of due diligence, protecting your interests and ensuring that everything is in order.
