Due diligence can be paraphrased as follows: In the investment review or disclosure of information, the careful, systematic and detailed collection, review and analysis of data from investment, takeover or merger candidates is understood or here the data is disclosed by the target object.
Due diligence: a careful analysis, examination and evaluation of an object of purchase
Particularly when it comes to buying a company, due diligence is used. According to AbbreviationFinder, due diligence is abbreviated as DD. This test can provide a precise picture of the quality of the company or of another object of purchase. This means that the investor checks all relevant aspects of the planned investment. As part of this examination, a systematic analysis and evaluation of the strengths and weaknesses of the object of purchase is carried out in order to secure the planned investment. In this way, the due diligence provides the actors with clarity about the traded values and risks.
In most cases, due to the detailed areas, the implementation can only be carried out with the help of experts such as industry experts, technicians, auditors or lawyers. For both the buyer and the seller, the due diligence process carries out a careful analysis of all information, which makes it possible to answer the questions that often arise in advance.
What does a due diligence entail
As a rule, various points are checked in the entire process and the results are then summarized as follows:
- The market-related due diligence
To make sure that there is a sufficiently large group of buyers, the market for the investment is checked in order to also define the competition.
- The corporate legal due diligence
The point here is to look at the legal structure of the company. That means all contracts, capital increases, resolutions of the shareholders, the supervisory board, other capital measures and also the situation of the shareholders.
- Financial due diligence
This step is all about the company’s financial situation. As part of this due diligence, the investor sifts through all of the financial statements, contracts, obligations and claims, as well as the budgets, giving the investor an accurate picture.
- Technical due diligence
For this part, specialists and experts are usually consulted, since the technology and the product are subjected to a closer examination, whereby the development process is also considered.
- IPR due diligence
It is checked here whether the rights and patents of third parties are affected or infringed. That means, everything here revolves around existing patents and copyrights.
- Personal due diligence
A venture capitalist also and above all invests in the team and for this reason he first gets a comprehensive impression of the founder, his experience and the references.
- Environmental due diligence
In some cases it may well be possible that it is necessary to check whether the investment in question creates potential environmental risks.
The findings that emerge from the above-mentioned individual audits are then summarized in the so-called due diligence report, which is then discussed with the founder and management team.
Get to know the company
In summary, this means that the person who plans to take over a company has a comprehensive picture of the company’s situation. This is the only way he can ensure that he does not experience any (nasty) surprises when taking over the company, and this is exactly why due diligence is used. In addition, when a company is taken over, the company should be compared with other companies in order to identify the trends in development and the market position.
If the takeover of a larger company is pending, then it is advisable to consult an advisor so that errors can be found in the examination and that all important figures and data are taken into account. Precisely this “due diligence” approach in the case of a takeover carried out by a third party is known as due diligence.
In addition, it should also be found out why the company is being given up by the previous owner. The following reasons for a company acquisition often play a role:
- Sickness or retirement
- Death – this results in the sale by the heirs
- Owner’s lack of money or reorientation
- The company was run down
Further points in the due diligence
In addition, the condition of the premises should also be checked, as well as the motivation and remuneration of the employees and their qualifications – all of this is just as interesting in the event of a takeover.
A strengths / weaknesses or opportunities / threats analysis provides information about possible next steps. Here, attention is paid to whether the weaknesses and risks are too great or whether this can be neutralized with the help of the strengths and opportunities.
The company’s reputation, contractual relationships, shareholdings, rights (protection / copyright / use) as well as possible liability and litigation risks are also important factors in assessing the transfer of the company during due diligence.
All this information makes it easier to estimate a realistic purchase price for the company handover.
The bottom line is that the due diligence forms a transparent basis for negotiations for the takeover of the company, where both sides can speak openly about the price. Future sales, costs, investment and earnings figures also play a role. A forecast period of 10 years should be estimated here.
