Due Diligence

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What is Due Diligence?

Due Diligence is the process whereby an investing party investigates, analyses, and evaluates an intended major investment, transaction, takeover, or business partnership prior to committing capital to it. The purpose of a due diligence investigation is to determine whether the investment makes financial and/or strategic sense and to check if the information about the investment that is available is correct and complete. Also, it is a way of preventing unnecessary harm to either party involved in a transaction.

Some typical areas for due diligence include the key risks associated with the opportunity, quality of the management team, assets, liabilities and solvency, a determination of the  purchase price, press and SEC filings, regulatory and licensing problems, liens and judgments, conflicts of interest, civil and criminal litigation matters, etc.

Forms of Due Diligence. Types.

Several types of Due Diligence can be distinguished, such as:

• Business Due Diligence: Business due diligence refers to ensuring that the buyer receives all material facts that are needed to make an accurate assessment and a fully informed decision of the real state of the organization while simultaneously not excessively harming the seller's business. Business Due Diligence actually is a very broad concept that includes operational due diligence; market due diligence; environmental due diligence; HR due diligence and other business-related types of due diligence.
• Financial Due Diligence: Financial due diligence involves a qualitative and quantitative assessment of an organization's financial performance, so as to create an understanding of its earnings and other financial perpectives on a normalized basis. Activities within this type of due diligence include reviewing accounting and auditing procedures; earning and cash flow analysis; reviewing operational processes and information systems so as to assess the extent to which financial information is reliable.
• Legal Due Diligence: Legal due diligence is associated with risk management. It analyzes the possible legal risks associated with the organization's corporate status, assets and liabilities, securities, employment conditions/regulations and so forth. In short, it analyzes an organization's intra- and inter corporate transactions in terms of its legal aspects.
• Tax Due Diligence: In tax due diligence, special attention is paid to the tax opportunities and possible pitfalls. It also provides insight into the tax structure and tax history of the company to be acquired and into the tax relationships with other (group) companies or related parties.
• Secretarial Due Diligence: Secretarial due diligence covers a secretarial audit of the targeted organization, and focuses on ensuring that the targeted organization complies with the rules and regulations of the buying organization.

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