Common occurrence in the fieldcapital investments are investments in the merger or acquisition of various types of business or companies. The primary task is to adequately argue the effectiveness of this kind of infusion, which must be supported by complete, most reliable and absolutely objective information about the subject of investment.
How to analyze the activities of the company from all sides? What is the term due diligence translation?
Deciphering the previously presented concept
Initially, it is worth answering the question:"Due diligence - what is it?" In essence, this is a comprehensive analysis of the firm’s activities, in particular the state of its financial affairs and the market position it occupies. The information base for the analysis is the internal documentation of the company and information received from competitors.
Why is this procedure needed?
Due diligence is carried out for the following purposes:
- Verification of authenticity of information about finances and other indicators of the company’s performance.
- Search for reasoned evidence that is the rationale for the implementation of measures developed by the business plan.
- Evaluation of the possibility of implementing tactical and strategic goals of the company.
- Verification of compliance of enterprise documentation with statutory rules for its execution, as well as internal regulations.
- Analysis of the accuracy and timeliness of the formation of tax, statistical and other reports.
- Determination of enterprise competitiveness within its target market segment.
- Estimates of the level of competence of the company's management in relation to the ability to implement strategic plans
Practical application of due diligence procedure
There is a list of situations in which this method of analysis should be carried out as an obligatory initial step, namely:
- merger or acquisition of a business;
- acquisition of shares or company shares;
- purchase of real estate;
- the establishment of newcomers partners;
- loan granting;
- targeted financing, in particular, sponsorship or gratuitous;
- other financial and commercial operationsorientation, in which it is necessary to provide genuine data about the object of the transaction, or about the funded company, or about the invested project to the depositor, sponsor or buyer, etc.
Expediency of due diligence of the company
В ходе осуществления данного всестороннего The research is a special project group, which consists of professional lawyers, appraisers, auditors, is engaged in collecting all sorts of information about the analyzed object and verification of financial statements, especially financial.
There are several cases that are relevant todue diligence. The translation of this term has already been considered earlier, but it is useful to recall that this is a comprehensive analysis of the authenticity of the data provided by the company.
To which business should this research be applied?
The above facts can be attributed to several companies that require due diligence:
- The so-called "companies for planting" (Seed). Basically, they act as projects and business ideas that require investment for more in-depth research or development of test units of goods.
- Newly Firms (Start up). Attracting investments is necessary for the implementation of research activities, and subsequently to begin implementation.
- Early Stage Companiesstage), that is, there is already an implementation of a trial batch of finished products. As a rule, they have no profit and require investment in the final stage of research projects.
- Firms located at the expansion stage(Expansion). There is a need to attract investment to develop new markets, increase production, conduct research in the field of marketing, increase production capacity and work units.
- Companies that are at the “guidance” stagebridges ”(Bridge financing). There is a need for funding for the transformation of the legal form, namely, private entrepreneurship into an open joint stock company, which is trying to carry out the procedure for registering its shares on the stock exchange.
- Existing firms attracting investments for the purchase by their managers of a ready-made business or existing productions (Management Buy-Out).
- Already existing companies whose managers require funding to buy firms from outside (Management Buy-In).
- Companies that are at the stage of a coup (Turnaround). They need investments to strengthen their financial condition.
From the listed facts it becomes clear that due diligence can give what it is in a general sense and whether it should be applied to a specific firm.
Species aspect of the procedure
Verification regarding the legality of allthe constituent documents and the correctness of the formation of the authorized capital are carried out by due diligence, the legal aspect of which is prevalent in this study.
This may include verification in the following areas:
- All moments with regards to the property aspect of the business being sold, more precisely, the existence of appropriate rights. The likelihood of risks associated with its dispute by third parties.
- Legal and valid legal reinforcement of transactions within the company, which was put up for sale. Evaluation of the possibility of claims regarding these commercial relations.
- The legal side of labor relations withhired employees, in particular, the correctness of employment contracts, procedures for admission-dismissal, distribution of liability, etc. Checking for the presence of risks of filing improperly dismissed employees.
- Соответствие действий фирмы требованиям corporate law, namely: the legality of the sale of shares or shares to other commercial structures. Assessment of the admissibility of claims by shareholders and equity owners regarding the violation of the relevant transactions.
What justifies the benefits of this study?
Equally important is the analysis within the engineering aspect, referred to as technical due diligence.
The usefulness of this procedure is supported by the following points:
- Собственник или инвестор получает сведения, acquired from a professional study of the technical condition of the property being checked, the presence of defects and the existing possibility of their elimination or improvement of the acceptable state of affairs. At the same time all engineering documentation is exposed to the analysis.
- There is the possibility of operating with reliabledata when carrying out the relevant calculations aimed at the economic feasibility of investment, if necessary repair or reconstruction of the object.
- All information obtained during the studynecessarily useful during negotiations with regards to the price of the object. It will be confirmatory in nature, as it is based on the professional opinion of experts.
Demand for the service of this research by the profiling companies
Due diligence service will help to get an objectiveopinion of a group of specialists due to their involvement from the outside. This will save money on the retraining of their own employees and avoid the bias of evaluating the object under consideration for financial investments.
The investor or owner has in histhe disposal of complex information in such areas as accounting, personnel and tax accounting, as well as legal and corporate expertise. All this will be able to organize legal due diligence.
Guideline when choosing a company specializing in this procedure
A company that performs due diligence must meet the following criteria:
- the presence of many years of experience in the relevant field of activity;
- high rating and flattering reviews of previous procedures;
- exceptionally highly qualified experts performing a comprehensive study;
- the ability to analyze a specific investment subject;
- the principle of efficiency in the research process, achieved through the professionalism of the expert group and the standardization of legal due diligence procedures;
- close cooperation of all specialists.
Are there interrelated stages of complex analysis?
This procedure can be divided into three stages:
- Remote request all necessarydocumentation from the company under inspection or direct departure to the analyzed object. In the case of the acquisition of shares or shares of a certain company, the expert group works on the spot. The rationale for this option is the fact that it is possible to promptly resolve the identified controversial points.
- Следующей стадией выступает детальная проработка collected in-house data. If additional information is required, it is obtained from outside, in particular, from unified state registers of legal entities or rights to real estate, or include licensing authorities.
- At the final stage, the expert group formsa single written report on the asset, which is represented by sections on the general information of the company, analyzed areas, possible risks and ways to eliminate them most effectively.
Из трех стадий, указанных ранее, можно formulate a detailed answer to the question: "Due diligence - what is it?" Thus, this procedure will allow in the shortest possible time to receive a reasoned response on the expediency of financial investments in the intended object. It is also able to identify ways to improve both the technical, legal and financial condition of the company.
Due diligence can be described as one offundamental stages of the purchase of assets, helping the investor to form a complete picture of the possible risks at the time of assigning the property and future crisis situations that may occur after the transaction. This procedure is aimed at checking the legality of all activities, as well as the commercial attractiveness of a potential transaction or investment object.
