Due Diligence (DD)

DD is a process whereby a potential deal or investment prospect is checked, investigated or audited. The idea behind is to verify everything that is revealed during the process of M&A & investment. 

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Why is DD Important?

A transaction that undergoes the DD process have more chances of becoming a success. DD helps you make decisions based on quality information.

Purchasers

DD enables purchasers to ensure that they’re correct in their expectations. As far as M&As are concerned, acquiring a commercial entity without performing DD significantly increases the purchaser’s risks.

Sellers

DD is carried out to increase customer confidence. That said, DD can also be beneficial to sellers. Why? Because conducting a thorough financial audit can increase the deal’s financial value.

Reasons for Performing DD

Reasons for performing DD include:

• Verifying data identified during the investment or transaction process 
• Identifying potential risks connected with a transaction or investment-related opportunity
• Retrieving useful info for evaluating a transaction
• Ensuring that a transaction or an opportunity for investment meet the required criteria

DD-Related Costs

DD costs can be influenced by a company’s scale, duration & structure complexity. DD-related costs can be absolutely justified in relation to risks associated with non-observance of a security audit. Usually, buyers & sellers cover expenses related to hiring a team of investment bankers, lawyers, bookkeepers & other consultants.

DD in Acquisitions & Mergers

These are the typical M&A-related questions

• Overview of the target company

1. Why do owners want to sell their company?
2. Did they try to sell the business before?
3. Are there any strategic objectives or a business plan?
4. Is the structure of the company too complex?
5. Did anybody attempt to purchase/merge the company before?
6. What’s the company’s structure geographically?

• Financing

1. Have the statements of the company been audited?
2. What do reports on the financial status of the company indicate?
3. What growth indicators can be observed?
4. Do the projected indicators make sense?
5. How much capital will the company need?
6. Which investment-related projects are being implemented & how much investment capital does it have?
7. Are there any liabilities & which are their terms?
8. Is the company able to cover expenses related to the transaction?

• Technology / Patents

1. Are there any patents being held?
2. Are there any registered trademarks being owned?
3. Are there any copyrighted products/materials being used?
4. How are trade secrets being kept secret?
5. Looking for legal advice on diligence?

• Strategy

1. Is the company going be able to integrate itself into the buyer's organization?
2. What synergy is going to be acquired?
3. Are there going to be any new products?

• Target Customers

1. Are there any target customers?
2. Will there be any risks involved for a consumer protection company?
3. Are there going to be any insurance questions regarding consumer protection?

• Management & Personnel Policy

1. Current salary structure as far as employees & management are concerned
2. Existing bonuses & privileges for personnel & management
3. Detailed resumes of the company’s managing and financial directors
4. Considering purchasing a company? Need to perform due diligence?

• Legal Issues

1. Ongoing, possible & pending lawsuits 
2. What are the lawsuits all about?
3. Is the company facing any lawsuits filed against it?
4. Is the company facing any lawsuits instigated by the authorities?

• IT

1. What software does the company use?
2. How much does the company pay for IT services annually?
3. To what extent are the current systems being used?

• Corporate Issues

1. Verifying corporate & organizational documentation
2. Statutory documentation
3. Current staff & managing directors
4. Holders of shares, corporate rights, & founders contract
5. Are there any branches or subsidiaries?

Restructuring and recapitalization documentation

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• Environmental Issues

1. Are any hazardous materials used?
2. Are there any environmental permissions?
3. Are there any environmental claims?
4. Are there any obligations to protect the environment?

• Manufacturing Facilities
  • Main subcontractors & suppliers
  • Monthly Profitability
  • Materials utilized during the manufacture process.
  • Has the company signed any agreements regarding the testing of its produce?
• Marketing Strategies

1. Did the company sign any franchise arrangements?
2. What is the company’s market strategy?
3. Did the company sign any contracts with distributors, agents or sales representatives?
4. What Makes DD So Important?

Reliability check makes it possible for investors to understand what the deal is all about & determine the risks associated with it. In fact, conducting a security check procedure is similar to doing “homework” in relation to a potential transaction and is of great importance for sound investment decisions.