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Due Diligence


https://masllp.com/due-diligence-process/Due diligence is an investigation that needs to be administered before finalising vital business decisions. Due diligence is often associated with large-scale investments, restructuring a company, or mergers and acquisitions (M & M&A).

Due diligence aims to examine the valuation of assets and liabilities, assess the risks among a business, and establish areas for further investigation; this allows an investor or purchaser to form wise investment decisions.

What does the due diligence process involve?
Due diligence is an in-depth process that covers several aspects of a business – from financial statements and accounting records to critical employees and contracts. The significant elements of a company covered by due diligence usually fall within these five broad areas:

  • Finances
  • Commercial performance
  • Legal compliance
  • Operations
  • Environmental impact

As there are not any official guidelines for what should be covered by the due diligence process, it’s usually tailored to every certain transaction. Some types of due diligence are essential in some industries than in others, and so the length, depth, and scope of the investigation generally depend on:

  • The character of the transaction involved
  • The purchasing or investing company’s interests and need
  • The perceived level of risk.

Importance of due diligence
Due diligence is an essential element to a successful transaction. Buying or selling a business is absolutely a complex process.  Therefore, it has its importance from the buyer’s side as well as the seller’s side. 

  • From a buyer’s perspective
    When factoring in a potential acquisition, your goal is to make the proper acquisition for the right price- you don’t want buyer’s remorse. It is where a rigorous due diligence process can help. In M&A, purchasing a business without doing due diligence substantially increases the level of risk to the purchaser. 
  • From a seller’s perspective
    Your goal is to secure a successful transaction and close it at the highest price possible as a seller. When done right, it permits the seller to be aware of opportunities to magnify its value before the sale. It will also provide accurate information for you to present to possible buyers. Therefore, it is not uncommon for sellers to draw up due diligence reports for themselves before potential transactions.

Financial due diligence
Financial due diligence is probably the most common and well-known type of due diligence; it involves analysing finance-related data, including historical financial statements, financial projections, outstanding debts, and any funding requirements. Financial due diligence may additionally involve checking the valuations of significant assets like PPE & Property.

Commercial due diligence
Before an entity makes a purchase decision or an investment decision, it must fully understand the takeover company’s present and forecasted commercial performance. Commercial due diligence assist an investor assess whether a takeover company is commercially viable; it addresses various factors such as comparable companies analysis, EBIT projections, P/E multiple and the target company’s reputation and market conditions. 

Operational due diligence
A target company’s daily operations could specify whether it might be the best match for a merger or whether it has the potential to achieve its proposed business plans. Therefore, the day-to-day running of a business can be the main concern for potential investors or buyers and is investigated through operational due diligence. We can divide the operational due diligence framework into five operational driver groups: people and organisation, cost and assets, scalability, potential, and risk.  

Legal due diligence
Legal due diligence can be described as a process where a comprehensive investigation and analysis is performed to assess the possible legal issues facing by a target company. It might include legal ownership of assets owned by the company, any legal claims made against the takeover company, or unsettled employment disputes. The legal, due diligence process additionally covers data protection. With the roll-out of GDPR, investors will want to understand where a takeover company stores and processes data thoroughly. 

Environmental due diligence
Recent trends in corporate social responsibility, ethical trading, and sustainability have operate an increased focus on assessing and managing environmental liabilities and risk. Environmental due diligence might include checking the takeover company’s carbon footprint, emissions, and compliance with industry ecological standards. Environmental due diligence is especially relevant if a company’s activity could create environmental risks or hazards. It is also more common in industries with tightly controlled ecological regulations. 

What is the difference between due diligence and an audit?
Although there is some overspread between audits and due diligence, the ideas are pretty different in terms of: 

An audit assesses whether a company’s financial statements equip an accurate & fair overview of its financial performance. In contrast, due diligence is the intense examination of the financials of a target business before entering into a proposed transaction.

An audit is based on historical data, whereas due diligence covers future growth prospects in addition to historical data.

An audit typically covers financial reports prepared by the auditors at the end of an accounting year; However, due diligence also involves checking and analysing financial statements and addresses many other company areas.

Who is involved?
Audits are usually performed by independent auditors or accountants – although an accountant expert in M&A might be involved with due diligence.

In an audit, audit opinion is deliverable. Whereas in due diligence, typically a formal written report, but maybe a summary of crucial deal points or verbal communication is deliverable.

At AJSH, we assist our clients in financial planning, operational support, fundraising, due diligence, etc., engaging as a strategic partner on an ongoing basis to help them grow their business. If you have any questions or wish to know more about due diligence, kindly contact us.


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