When an acquisition or purchase process is to be carried out and there is real interest from the potential investor, this usually materializes in the signing of a letter of intent or a non-binding offer.
However, to know if the investment you intend to make is really convenient, it is necessary to carry out a thorough review of the conditions of the companies in the framework of the transaction process.
Contrary to what is believed, this review, which includes tax and technological aspects, is not an audit. The process that is carried out in these cases is called due diligence.
What is Due Diligence?
Due diligence is a procedure that verifies and identifies risks within a business opportunity. It encompasses all the actions taken by the business to thoroughly analyze the accounting and legal assets and liabilities of a particular company before pushing through with the acquisition.
Due diligence varies from auditing in that it is an analytical and evaluative study of data, information, and documents from various areas of the organization to know its long-term sustainability. The purpose of doing due diligence may vary depending on the needs and objectives of the contractors.
In contrast, an audit is conducted in order to form a decision on whether the figures in a company’s financial statements are reasonable or not, which is always in accordance with widely accepted accounting principles. For its part, due diligence seeks to normalize the figures in the financial statements, i.e. determine how income and profitability can be sustainable through the identification of non-recurring income or expenses that affect revenue.
Additionally, there is also the analysis of current assets and liabilities generated by the operation of the business and the factors that could impact it, such as obsolete inventories, problems to collect collection accounts, obligations omitted or not reflected in financial statements, among others.
This process aims to find and reduce the risks of transactions, providing an objective and detailed analysis of the business. In this way, a coherent and informed strategy for post-transaction can be established, as well as quantify synergies that can be exploited by the investor, or even determine possible environmental or labor contingencies.
The possible risks encountered through due diligence are managed under the final contract of sale or may become deal-breakers (break the negotiation).
In a buying and selling process, it is really important to have adequate support during the planning, execution, and closing of the transaction. Doing it in an informed and timely manner always requires the help of an expert team, capable of advising you at all times and guiding you in making the most appropriate decisions for your business.
Consider these factors when making a purchase or sale of a business:
- A specialized accompaniment during the planning, execution, and closing of the transaction.
- The accompaniment must be carried out by an expert who knows the needs of your business and helps you to cover yourself from potential risks.
- Establish a coherent and informed post-transaction strategy.
- Identify and quantify synergies that can be exploited by who intends to buy/invest.
- Be clear that tax, labor, legal, technological, environmental aspects, among others, must be identified to confirm financial model variables or identify deal-breakers.
Due diligence process must generate impacts on both stakeholders and society and the environment, and for this, it requires an analysis of the life cycle of products and services offered by the company, of the value chain, and the origin of the inputs used. It is necessary to identify how these aspects generate a negative impact on society and the environment; and on the other hand, what they contribute to improving the conditions of the interested parties and society and the environment.
This due diligence process, in turn, leads to a prioritization of issues of interest to the company, and defines mechanisms: first, when identifying impacts; and secondly, by defining tools, by putting weight on different issues, and how much impact they generate.
In recent years international and national attention and importance have grown around the issue of due diligence and this forced more time. By making companies aware of Responsible Business Conduct and the importance of implementing a due diligence process, we hope to inspire and motivate companies to apply this to all their business activities and processes.
How does Due Diligence Assist in Decision Making?
Due diligence points out the risks that exist in an operation, allowing buyers to negotiate the value of the transaction based on the answers given, the numbers presented (confirming whether they represent reality) and any existing liabilities.
In addition, it can help the organization for a better understanding on some relevant aspects of its market positioning, its competition, and key business risks, as well as help with projecting and planning the company’s next steps.
Why is Due Diligence Required?
Among the several reasons among which due diligence is necessary, we can highlight:
- negotiations related to the purchase and sale of products and services;
- feasibility analysis of new product and service development;
- negotiations involving acquisitions, sales, mergers, incorporations and other forms of business partnerships.
For due diligence efforts to be effective, you need to follow some important rules, such as:
- focus on really fundamental information, preventing the analysis of documents that may bring data that do not influence the final result of the study;
- cordiality with the employees responsible for document delivery and data provision;
- determine the items you want to search;
- plan and request information in advance;
- concentrate on a few collaborators the delivery of data to the professional who will perform the activity;
- request small meetings together to clarify specific questions, among other actions.
It is very important to have the right professional strategic property adviser to do this type of study and obtain efficient results, which will bring positive returns for your company.
In addition, it is essential to understand that a Due Diligence survey is suitable for any type of business, regardless of its size and segment. Obviously, according to the case of each company, the scope of the work is previously defined to meet the specific demand. After all, without this procedure of assessing the current state of the company, the future risks that the investor will suffer can be huge.