What is Due Diligence?
Source: Marcin Pietraszek, Empemedia.pl
Are you looking for a foreign investor? Be prepared for your business to undergo a thorough x-ray.According to the standard procedure, Western investors first use the Due Diligence service before they decide to cooperate. What is this procedure and what does it consist of?
Due Diligence in sales - and more
The Due Diligence mechanism is used by investors when they plan to take over a specific enterprise. Thanks to it, they are able to assess the condition of the acquired company - it mainly concerns the organizational, tax, legal and financial aspects.
On the other hand, Due Diligence is also used by companies that are subject to takeover. Owing to such a tool, the owners are able to improve the condition of the enterprise so as not to discourage the potential investor.
It is worth knowing, however, that Due Diligence may be useful not only in the event of a change of the company's owner. It can serve as a mechanism supporting debt relief, transfer of ownership, separation, etc.
“Due Diligence is a tool that can also benefit a company that wants to identify its strengths and weaknesses. Conducting an analysis may allow for the elimination of potential threats and indicate directions of development. As a result, each enterprise subjected to such research can improve its financial results, ”says Paweł Buszkiewicz, managing director at ARKANA Law Office in Gdynia.
Due Diligence and audit
Although the Due Diligence mechanism may resemble a classic audit, this understanding is not entirely correct. In the case of an audit, we deal with the assessment of only one aspect of the enterprise - e.g. legal or accounting. Due Diligence, on the other hand, covers not only all elements of the company itself, but also its entire environment.
"Due diligence covers, inter alia, legal, tax, financial and technological analysis, not limited to the enterprise itself, but also taking into account external factors and risks, such as the activity of competitors, cooperation with contractors or the stability of the legal system", notes Paweł Buszkiewicz.
It is worth noting that such complexity is a big advantage of Due Diligence. It allows you to focus on all dimensions of the company, even those that are often ignored during a classic audit. Meanwhile, it may turn out that they have the potential or, on the contrary, pose a threat.
"An example of threats that are difficult to identify without a thorough analysis of documents is, inter alia, the use of copyrights by the enterprise without acquiring the right to use them in a given field of exploitation, or the scope of owned rights to the real estate used and possible easements. Another aspect, unjustly overlooked by some investors, is the formation of the employee team. If the potential of the entire company focuses on one or more employees, then their departure from work may significantly disturb the company's situation, ”says Tomasz Lewandowicz, attorney-at-law at ARKANA Law Office.
When, how and for how much? Features of Due Diligence
It is difficult to say how long Due Diligence may take for a company. This is due to the fact that it is influenced by such aspects as the size of the enterprise, the number of employees, the specificity of the market or the stage of the company's development. Therefore, you can come across a situation where Due Diligence is carried out immediately, within a week, but it may also turn out that it will be necessary to settle the time in months.
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When it comes to the price of Due Diligence, also in this case it cannot be determined unequivocally. In addition to the above aspects, the scope of the company's activity may be important here - if it is very narrow and requires specialized experts, the costs may increase.
“It is worth pointing to one of the methods that allow to reduce the costs of Due Diligence services, and at the same time to reduce the investment risk. That way is to make an investment in a group ”. Paweł Buszkiewicz suggests. “As a result, both the analysis costs and the risk associated with the investment are spread over two or more entities. At the same time, the involvement of fewer funds in the investment allows the investor to diversify his investment portfolio more widely. "