What is due diligence?

Due diligence is a process of thorough investigation and analysis undertaken to evaluate a company, an individual or an investment opportunity. The objective of due diligence is to obtain complete and accurate information about the entity or opportunity in question so that investors or buyers can make informed decisions and minimise the risk of financial or legal loss.

The due diligence process typically involves reviewing legal and financial documents, as well as conducting interviews with management, employees and other relevant stakeholders. It may also involve reviewing the competitive situation, analysing the market, assessing risks and identifying opportunities to improve efficiency or profitability.

It is a fundamental process for making informed business and investment decisions, and can be crucial to avoid unpleasant or costly surprises in the future, which is why it is best to seek advice from a commercial lawyer.

How is due diligence done?

The due diligence process may vary depending on the entity or opportunity being evaluated, but generally follows the following steps:

• Define the objectives and scope: Before beginning the due diligence process, it is important to define the objectives and scope of the evaluation. This includes determining what information is needed to make an informed decision and who the stakeholders in the process are.
• Gather information: The next stage is to gather the information needed for the assessment. This may include reviewing legal and financial documents, conducting interviews with management, employees and other relevant stakeholders, and reviewing the competitive situation and the market.
• Analyse the information: Once the information has been collected, it should be carefully analysed to assess the situation. This may include assessing risks and opportunities, identifying problems or areas for improvement, and preparing a due diligence report summarising the findings.
• Make decisions: Based on the results of the due diligence, investors or buyers can make informed decisions on whether to proceed with the transaction, negotiate the terms of the transaction, or walk away from the transaction.

Benefits of Due Diligence

The benefits of due diligence include:

• Identifying risks and opportunities: Due diligence allows buyers or investors to gain a thorough understanding of the company and to understand the risks and opportunities associated with the transaction.
• Improve decision making: Information gathered during due diligence can help buyers or investors make more informed decisions and structure the transaction more effectively.
• Minimise risk: Due diligence helps identify potential risks and develop strategies to mitigate or avoid them.
• Maximise value: By gaining a thorough understanding of the target company, buyers or investors can identify areas where value can be added and profitability enhanced.
• Comply with legal and regulatory requirements: Due diligence can help buyers or investors ensure that the transaction complies with all legal and regulatory requirements.

Objectives of Due Diligence

• Assess the financial situation: Due diligence also aims to assess the financial situation of the target company. This may include reviewing financial statements, accounting policies, financial obligations and other relevant financial aspects.
• Verify the validity of information: Due diligence aims to verify the validity of the information provided by the target company. This may include reviewing accounting records, legal documents, contracts and other relevant sources of information.
• Assess asset quality: Due diligence also aims to assess the quality of the target company's assets. This may include reviewing intellectual property, leases, distribution agreements and other relevant assets.
• Assess the status of management: Due diligence also aims to assess the status of the management of the target company. This may include reviewing the structure of the company, the experience and skills of the management team, and other aspects related to the management of the company.

What are the stages of due diligence?

Typical stages of due diligence may vary depending on the type of transaction and the target company, but the following are some common stages that are usually followed in most cases:

1. Planning and scoping: This stage defines the scope of the due diligence, establishes the working team, draws up a work plan and defines a timetable for the investigation process.
2. Document review: In this stage, the relevant documentation of the company that is the object of the transaction is compiled and reviewed, such as financial statements, accounting records, contracts, legal agreements, among others.
3. Financial analysis: This stage involves a detailed analysis of the financial statements and financial situation of the target company, including the evaluation of cash flows, assets, liabilities and equity.
4. Legal analysis: This stage involves a detailed review of the legal agreements, contracts, obligations and other relevant legal aspects of the target company.
5. Operational analysis: This stage assesses the operation and management of the target company, including analysis of the supply chain, production processes, human resources and other relevant operational aspects.
6. Risk and opportunity analysis: This stage identifies and evaluates the risks and opportunities associated with the transaction, and develops strategies to mitigate the risks and take advantage of the opportunities.
7. Due diligence report: A due diligence report summarising the findings and conclusions of the investigation process is prepared and presented to the buyers or investors to assist them in their decision making.