“Due Diligence is the investigative process of a potential deal that the investor shall carry out to enable the risk assessment in a transaction”.
Diligence has been used since circa the 15th century and it carried the sense of “necessary effort”. Centuries later, the phrase developed into the legal meaning of “the care that a reasonable person takes to prevent harm to other people or their property”. In this sense, it is synonymous with another legal term – mutual care. More recently, Due Diligence has expanded its reach in the corporate context and it means “the research that a company undertakes before engaging in a financial transaction”. This meaning can also be applied to individuals, that is to say, people are often advised to carry out their due diligence before buying a home, signing a loan, or making any major purchases.
Admitting you are planning to buy out one of your competitors. The company is attractive to you because it is perfectly positioned in a region where your company is unable to enter with its products.
Before signing off on the deal, you settle down with the seller that a Due Diligence process will be carried out by a specialized company hired by you.
These are just some of the questions that must be answered by the seller throughout a Due Diligence process. Therefore, if you are thinking of selling your company, before starting the sales process, be prepared to answer these and many other questions that are part of the process.
If you are not 100% sure, we recommend hiring our Business Diagnostic services, with which you will be able to identify possible points of improvement and rest assured that your company is prepared to move on with the sales process.
Generally speaking, Due Diligence processes in the Accounting and Financial areas aim to calculate the EBITDA (earnings before interest, taxes, depreciation, and amortization) and assess the quality of the results and of its assets, in addition to presenting a clear understanding of the working capital and the company’s indebtedness.
Generally speaking, Due Diligence processes involving tax, labor, and pension areas aim at presenting a better understanding of potential liabilities arising from tax, labor, and pension legislation misinterpretations and that may entail encumbrances after the company’s purchase process is concluded.
Overall, the commercial Due Diligence process addresses the investment analysis from a commercial vantage point; the market into which the company operates, the premises adopted for revenue projections, as well as the main items that generate value and the identification of growth barriers.
In general lines, the operational Due Diligence process will present a better understanding of the company’s current operational capacity, bottlenecks, and the risks related to operational barriers and/or the need for suitable investments to sustain the company’s growth projections.
Generally speaking, the Environmental Due Diligence process aims at analyzing the business-related environmental risks, presenting the cost estimates, and assessing the compliance with environmental standards, among other important aspects.
Generically, The Legal Due Diligence process involves collecting data related to judicial and administrative proceedings, corporate equity status, clearance certificates from diverse areas and agencies, ongoing contracts with future liabilities, among others.
Generally, the HR Due Diligence process aims at learning about the scenarios related to the company’s career plans and salary grades and its Human Resources environment, as well as understanding how the payroll costs will behave after the acquisition process.
Fill out the form and one of our professionals will contact you to schedule a meeting.
See the most frequently asked questions about Due Diligence. If you have any questions, please contact us, we will be happy to talk to you.
The most common types of Due Diligence for small and medium-sized enterprises (SMEs) are Accounting and Financial, Labor, Operational, Commercial and Legal. However, depending on the business size, market, and segment, other analyses may turn out necessary. Due to that, having expert advice at such a time is of utmost importance for it will help the buyer or investor make a decision based on in-depth analyses of the company.
Relying on the assistance of specialized advisors will give the buyer or investor a solid basis for a conscious decision-making process, mitigating potential risks.
Generally, it is not a good indicator when a company does not have the basic information to perform Due Diligence. The lack of basic information requires a lot of attention on the part of the buyer, who must evaluate in such cases if benefits outweigh risks.
With the purpose of avoiding the discontinuity of the negotiation process stemming from the lack of basic information, it is highly recommended that entrepreneurs (sellers) prepare their companies for the sale in advance by organizing all the information, and structuring the business valuation
It depends! Considering that Due Diligence is a broad investigation that stretches over several areas within the organization, it is readily perceived that the person responsible for carrying it out needs to have extensive knowledge of all areas investigated.
However, if the Due Diligence process is carried out in a specific area of the company, where extensive knowledge on the matter is upheld, it is natural that it could be done.
