Due diligence – execution and checklists

Due diligence (DD) refers to the thorough examination of the object of a sale in advance of purchase. The focus here will be on balance sheets, human and material resources, strategic positioning, legal and financial risks and environmental burdens.

Due Diligence

Due diligence basically serves for information purposes, reduces the information-asymmetry between the buyer and the seller and supplies the information required for a qualified decision. Based on the information provided, the defining parameters for the valuation can be made plausible. If the buyer is not a natural person but rather a company (represented by that company's decision-makers), the due diligence also takes on an important accounting function since the managers are able to document their careful actions to stakeholders.

There needs to be a systematic and transparent communication at all times during the execution of the due diligence process. This ensures that comprehensive information is exchanged in a targeted way and flows into the formation of agreements as necessary and where relevant.

There are various types of due diligence (e.g. pre-due diligence, pre-acquisition due diligence, post-completion due diligence, post-acquisition due diligence), which differ in terms of when the relevant objectives are carried out. In a standard sales process, due diligence takes place when the parties are in fundamental agreement and the conditions have been set out in a so-called "term sheet" or in a non-binding purchase offer that has been accepted by the seller. Following the execution of due diligence, this "term sheet" forms the basis for the draft of the purchase agreements. Once all the contracts and agreements were signed, the deal becomes legally binding.

For the execution of DD, the seller or his/her advisor provides a data room in which the necessary documents and information are placed. The data room may be provided as a physical or virtual room.

Main points of analysis in a due diligence process

The due diligence process comprises the following areas:

  • Legal situation (legal due diligence)
  • Fiscal situation (tax due diligence)
  • Financial situation (financial due diligence)
  • Market, industry and strategy (market / commercial / strategic due diligence)
  • Environmental sustainability (environmental due diligence)
  • Insurance protection (insurance due diligence)
  • Technology (technical due diligence)
  • IT systems (IT due diligence)
  • Employee situation (human resources due diligence)

As evident from the above criteria, this checklist can be expanded or reduced as required. Usually the buyer presents a list of documents to the seller that he/she or his/her advisor wishes to see. To ensure an efficient process, we recommend that both parties agree on a due diligence list together (list of contents). The buyer thus has time to prepare and the seller can inform the buyer within an appropriate time, if certain required documents do not exist (for example only a few SMEs have a well-developed business plan for the next five years or detailed market and competitor analyses).

The person carrying out the due diligence will summarise the results in a due diligence report. Quantifiable results are used to verify the plausibility of the sale price. Non-quantifiable results or factors that cannot be reviewed, lead to the incorporation of specific guarantees in the purchase agreement.

Factors for success in the execution of due diligence

Anyone wanting to carry out an efficient and yet cost-effective due diligence process should align the main focal points of the analysis to the company under examination. Of particular importance are company type and size, the deal structure (asset deal vs. share deal) and the objectives of the commissioning buyer. Therefore, it makes little sense, for example, to carry out a thorough due diligence into VAT if the company is being taken over in the context of an asset deal.

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