Due Diligence: What does this term mean in simple words?

Publication date/update: 11.02.2024

Due diligence is a pivotal component of comprehensive business analysis. Within the scope of such an audit, a businessman can fortify their relationships with counterparts and execute significant deals yielding substantial profits. Not all circumstances necessitate resorting to this procedure; in some instances, a simple audit suffices. However, if a client intends to acquire a business, a sizable real estate asset, or a land plot, we advocate specifically for due diligence.

The due diligence process empowers companies to accurately assess all risks and foster high-quality relationships with counterparts. In the event of litigation, lawyers can construct a robust defense of the client's interests. So, in which scenarios is it imperative to engage in this procedure? We shall elucidate in this article.

The Due Diligence procedure originated in the USA, where brokers disclosed data about companies and securities on the stock market to investors. Today, the methods have evolved somewhat, but one aspect remains constant: the collection and analysis of data for an overall assessment of various risks associated with the investment process. Due Diligence aids in gathering accurate data and conducting expert evaluations of the collected information about the subject.

The procedure aims to verify the legality of the investment object's operations, as well as the commercial attractiveness of the future transaction. The examination encompasses areas such as accounting, personnel, and tax records.

Which transactions are suitable for Due Diligence?

There are several types of procedures, among which the following can be distinguished:

Usually, Due Diligence is conducted concerning the following assets:

Due Diligence can be commissioned by a company's management, a bank, an investor, a partner, or a counterpart.

The duration of the inspection is influenced by the size of the business undergoing scrutiny. If it involves checking a couple of assets within a transaction, it can be completed within a few weeks. However, for a comprehensive examination of a company within a merger and acquisition framework, one should not expect quick results. In this case, the inspection can last up to a year.

Today, it is crucial for any businessman to manage risks effectively to make informed decisions. This will facilitate better financial management and enable the formation of a sound investment policy. To achieve these objectives, the following procedure is relevant:

The report on the results of the procedure contains data on the results of the examination from lawyers, appraisers, technical specialists, financiers, and auditors. Accordingly, at the end, either one consolidated report or three separate documents may be issued. However, any of these options is acceptable, as the business representative will be able to gain an understanding of the analyzed object/entity.

What should the report on the results of due diligence include?

This type of examination should take into account the following aspects:

This type of examination should consider the following aspects:

Legal scrutiny should fully disclose the complex relationships within the organization and with external counterparts. This is important from the perspective of assessing the business environment. Legal due diligence can be conducted in blocks, each of which can be divided by objectives and subjects of examination. What could this entail?

The importance of legal due diligence lies in assessing compliance with various legislative norms - land, labor, and others. It is equally important to assess the company's position in the market to evaluate the competitive environment.

It is important to understand that legal due diligence can be conducted in a truncated format. The final scope always depends on the research goals. The examination primarily helps prepare for a significant transaction and mitigate the risks of problems arising after contract signing.

Essentially, the procedure of due diligence can be commissioned from certain types of companies. This includes consulting agencies, law firms, auditing firms, and others. In some cases, the procedure can be conducted by an external specialist. However, it is difficult for one entity to perform the entire range of procedures alone. For certain types of analysis, such as technical analysis, it is necessary to engage independent specialists.

What criteria should one consider when choosing a firm?

While it is possible to conduct the procedure using internal company resources, it is challenging. While it certainly saves costs, it carries several drawbacks. Primarily, employees may not be able to fulfill their primary duties. Additionally, employees may only handle the procedure if it pertains to a similar field. There is also the factor of subjectivity.

In Due Diligence, the following risks can be identified and assessed:

There are various methods of pricing Due Diligence services, so prices for services vary significantly between different companies. In any case, conducting these activities is costly due to the high level of labor intensity, responsibility, and exclusivity for our companies.

Companies from the Big Four, which also deal with international law, set high prices. Well-known Russian firms typically operate in the mid-price segment while maintaining a good reputation.