Due Diligence (DD) refers to the "due diligence" with which a purchase is approved in advance. Subjects implicated are balance sheets, people and material resources, strategic positioning, legal and financial risks and environmental liabilities.
The due diligence has basically an informative role, it reduces the information asymmetry between buyers and sellers and provides the necessary information for a qualified decision. Based on the information provided, authorative parameters can be made plausible for the evaluation (evaluation function). If the buyer is not a natural person, but a company instead (represented by its decision makers), then the due diligence has an important accountability function, because the managers can document a careful, conscientious deal for its stakeholders (exculpation function).
Different types of due diligence are distinguished between (e.g. pre due diligence, pre acquisition due diligence, post-completion due diligence, post acquisition due diligence), which differ depending on the time of implementation as well as the objective. Due diligence takes place in the usual sales process, if the parties have agreed in principle and the conditions are specified in a so-called "Term Sheet" and in a non-binding offer to purchase, and this is accepted by the seller. After due diligence has been carried out, this "Term Sheet" is the basis for the development of the sales contracts. Only when the deal is signed does it become legally binding.
For the implementation of DD, the seller or his advisors set up a data room, in which the necessary documents and information are available. The data room can be made available physically or virtually.
Analytical focus of a due diligence inspection
The due diligence inspection covers the following areas:
As the above criteria suggests, this list can be extended or shortened. Usually the seller presents the buyer or his advisors with a (wish) list of documents to be examined to. For an efficient process, we recommend that both parties agree on a joint due diligence list (Index). The buyers can prepare themselves and the seller can inform the buyer early enough if certain desired documents do not exist (for example, only a few SMEs have a business plan drawn up for the next 5 years or a detailed market and competitive analysis).
The inspector summarises the results in a due diligence report. Quantifiable results are used to validate the sales price. Non-quantifiable results lead to the recording of specific guarantees in the purchase agreement.
Success factors in the implementation of due diligence
Those seeking an efficient and cost-minimising due diligence review, specify the analysis focus of the due diligence on the company to be audited (type, size), the deal structure (Asset vs. Deal. Share Deal) and the objectives of the client. It makes little sense to conduct a thorough tax due diligence if the company is taken over in the context of an asset deal.