If you are an entrepreneur and you are evaluating the possibility of buying or investing in a new company,it would be best to carry out research that allows you to know any important data that could influence decision-making. An investigation that is carried out through a due diligence.
What is a due diligence and what is it for?
A due diligence is an investigation process usually initiated by the buyer or investor of a company,once the first negotiations have been initiated, as a precondition to the signing of a purchase-sale contract or a capital increase.
The objective of due diligence is none other than to know the possible risks that a company has, in order to analyze its true economic and financial reality. This way they will have more information to determine if the company is really worth what its owners say it is worth, and if everything is correct.
To undertake a due diligence it is an essential requirement to have the consent of the owner of the company. Also, as it is a kind of audit, it is best that it is carried out by a third person independent of both parties, in order to obtain an expert and totally impartial opinion.
The due diligence should be carried out in the shortest possible time to try to interrupt the business activity as little as possible. If possible hidden risks were to be found, it would be best to start negotiations again, taking into account the new situation.
While the due diligence is being carried out, the owner of the company will be obliged to provide all the necessary information,which means that he will not be able to hide or misrepresent any documents. Otherwise, the nullity of the contract could be carried out, having to pay the corresponding compensation for the damages caused.
Furthermore, this whole process must be accompanied by a confidentiality agreement signed by both parties, which cannot be broken under any circumstances.
How to do a due diligence?
When doing a due diligence, each of the aspects of the business will be examined, thus detecting any lack or uncontrolled eventuality. This means that the investigation will affect all areas of the company, with the aim that the transaction can take place safely,with a total guarantee.
- Corporate: capital structure, agreements between partners, administrative bodies, as well as other aspects related to decision-making and compliance with commercial obligations.
- Privacy and intellectual property:clauses in contracts with employees, collaborators and customers, registration of trademarks, patents and domains, data protection, etc.
- Fiscal, labor, accounting and financial:fulfillment of obligations with the administrations, internal documentation, verification of the accounting.
- Procedural: formal proceedings initiated by or against the company, claims and other risks detected.
To begin this whole process, both parties must have agreed on the more general terms. Once this is done, the due diligence will be carried out as soon as possible so as not to interfere in the business activity, as well as so that the buyer or investor has more time to make a decision.
The company must appoint workers who will be responsible for mediating with the person responsible for performing the due diligence,responding to all requests requested. In addition, a specific room will have to be set up, where those in charge of the investigation will examine all the necessary information.
When does the due diligence end?
Once all the relevant investigation has been carried out, in order to complete the due diligence process, a report detailing all the commercial, technological, accounting and labour aspects that have been examined and reviewed during the investigation will have to be completed.
Here it should be noted that those responsible for this process will not make a simple diagnosis of the company examined, since they must also make their own interpretation,to offer the best possible advice to the buyer or investor, helping them to make the best decisions to make the transaction convenient and successful.
Once the whole due diligence process has been completed, the buyer or investor will have a much more reliable picture of the real situation in which the company finds itself. In this way you can make all the changes you think necessary to increase both the economic and productive growth of the company.
Due diligence is shown as a totally recommended process when buying or investing in a company, through which you can know the real situation in which the company in question is, and thus make more reliable decisions that do not affect the future of the buyer or investor.