A due diligence procedure is necessary to increase the level of trust between the participants in the transaction. This article will consider common stages in preparing for this procedure.
The essence of due diligence in business
Due diligence is a comprehensive analysis of a business project and becomes the basis for a trusting relationship between investors and participants in the process. The procedure’s main goal is to investigate the reliability and financial stability of potential partners or clients since identifying possible risks often becomes the prevention of fraud or unsuccessful investments. Usually, a company invites a team of experts in the appraisal, financial and legal fields to conduct due diligence before concluding a contract with another company, a joint deal, or buying a business.
It is worth noting that the demand for such services increased during the Great Depression, at the end of the 20s of the last century. At this time, giants absorbed weaker companies, bold deals were concluded, and it was necessary to assess risks and check enterprises for “legality.” A lot of time has passed, but the procedure remains in demand, after all, the era of capitalism.
It is important to understand that if an investor appoints due diligence, he is serious about investing in your project. On the one hand, this is only a test; on the other hand, this can be the beginning of work, so it is important for founders to show their business skills to prove themselves.
How to prepare for due diligence?
The procedure of preparing for the due diligence includes the following stages:
- Selection of a professional team of consultants
Usually, the buyer engages consultants and experts to carry out the Due Diligence procedure. At a minimum, the due diligence team should include appraisal, legal and financial/accounting staff. It may also include economists, engineers, and security specialists.
- Statement of terms of reference
A good due diligence procedure should begin with preparing a comprehensive, detailed specification for the due diligence procedure. The terms of reference should be drawn up by the investor – the customer of the work with the direct participation of the performer – the due diligence team. It is necessary because the investor sometimes has questions about doing business, and only the investor knows what he expects from the company being acquired.
- Negotiations and interviews with the seller
The investor should obtain information not available in the documents during negotiations and interviews with seller officials. It is an important part of due diligence. Such negotiations should take place in a friendly and discreet atmosphere. At the same time, we proceed from the understanding that we are talking about a friendly purchase (acquisition).
- Preparation of documents and places of work with them by the seller
It is very important to have all the necessary documents in one secure place, in a special virtual data room, to facilitate work and save time. In addition, it enables the search for documents, allows asking staff questions and negotiating, and allows the seller to control somehow the process of working with documents.
- Gathering necessary and sufficient information
Equally important in the due diligence procedure is the verification of intercompany transactions: any contracts concluded by the company, including any protocols of intent, transfers of funds, and the proposed public offering of shares. A thorough analysis of litigation risks about the company, verification of intellectual property rights, antimonopoly law issues, and environmental protection is required.