When and why is it needed?
The buying of a pig in a poke usually shows little promise and in case of business it is even more dangerous and may lead to serious financial losses. In our practice while checking the companies subject to acquisition we regularly find out that the seller is not a legal owner of a company. At the same time such an “owner” often doesn’t even know that the property belongs to some other person.
Therefore, we propose to make a preliminary analysis of the acquired business (Due Diligence procedure) to reduce the negative consequences of a deal or to determine more equitable price also considering existing risks.
How it’s made?
There is no any uniform plan of the Due Diligence procedure. Moreover, such uniform plan cannot be even drafted as all peculiarities of a particular deal cannot be foreseen. So, the most important task of Due Diligence is to specify the aims of this procedure, issues to be covered by the check as well as to determine the scope of the check, procedures to be used and the extent of detailing.
As a rule, the Due Diligence covers the following spheres:
- corporate law (including the structure of ownership, management, antimonopoly regulations and securities);
- employment relations (local acts, relations with trade unions etc);
- titles on real estate and other property, including intellectual property rights;
- structure of accounts receivable and payable;
- main commercial transactions;
- compliance with tax and currency legislation;
- litigations, as well potential ones, claims of contractors and customers.
What is the result?
You get a final report containing findings and legal opinion on object of acquisition or investment. The special attention is paid to the structure of existing individual risks of this object.
Advice on relevance of deal conclusion or alteration of its terms, possible threats to ownership rights, the cost of the object subject to acquisition.
If needed – recommendation on correction of errors in transaction that has already been concluded.
Attraction of external financing, investment or arrangement of IPO often requires the change of usual corporate structure or established commercial relations to more transparent or understandable for investors. Non-compliance to qualifying standards may lead either to refusal of providing funds, investment or to the substantial change of the deal conditions. And such restructuring cannot be achieved without the Due Diligence procedure.
Also it may be revealed within the Due Diligence that a transaction may be challenged by the third party or some events in Company’s history can be a reason for lawsuits. Such findings may considerably reduce the cost of acquired asset.
Furthermore, it makes sense to carry Due Diligence after the restructuring, business reorganization, alterations in constituent instruments, also in order to prevent the change of the business management structure.
Here you may see the specimen of simplified plan of Due Diligence.