Due Diligence

The term Due Diligence was introduced in the 1930’ of the XX-th century in the United States of America. Originally it designated the procedure of disclosing of the information by the broker for the investor about the company which securities were sold in the open share market.

Presently this concept got a rather broad meaning. Today Due Diligence means a complex check carried out for estimation of various risks, connected with investment. As a rule, it is conducted at the decision about share purchase in business or business project as a whole. Sometimes Due Diligence is defined as the appropriate research carried out by interested parties when preparing documents on transaction for the purpose of formation of a confidential basis concerning the validity and completeness of points in documents and the containing facts. On occasion this term means gathering and the analysis of the information on potential or existing clients and partners for the purpose of an estimation of their financial condition and reliability.

The purpose of Due Diligence is carrying out of the analysis allowing business entity to exclude or substantially minimize possible negative consequences of the concluded transaction, and also optimization of business processes in further activity of the company.

In spite of the fact that Due diligence procedure has special features for each case, there are main stages of Diligence carrying out. According to the hands-on experience the stages are:

  • Specification of the purposes, problems, study of terms of its carrying out, a concrete definition of object of check, degree of detailed elaboration and other conditions of Due Diligence carrying out;
  • Definition of a technique of study;
  • Interviewing of key employees of the company;
  • Document retrieval for check, their ordering and generalization according to certain subjects;
  • The analysis of the maintenance of the chosen documents as to their conformity to acting rules of law and intracorporate standards, with simultaneous ascertaining of initial conclusions and offers from the results of the legal analysis of documents;
  • Granting of the expert advice and issue of recommendations.

Kinds of Due Diligence carrying out

  • Financial Due Diligence - financial analysis; draws the conclusion about ability of the enterprise to bring in the income. It is expedient to carry out the financial analysis simultaneously with enterprise audit in the course of which the correctness of book keeping, reliability of the reporting and other documentation and their conformity to statutory acts are defined. In the course of the financial analysis the company assets, its incomes, financial ratio and financial planning and control system are studied.
  • Tax Due Diligence - tax analysis, draws the conclusion about tax loading on the enterprise. In the same way at problem definition, during the tax analysis, possibility of tax optimization can be revealed.
  • Legal Due Diligence is a system of actions of the juridical and legal expertise on all-round check of legality of the planned transaction, the investment project, including an estimation of activity of the company, and also object of investment, from the legal point of view, and revealing of possible risks.

Due Diligence transactions with the ground areas and the real estate may be attributed to Legal Due Diligence.

Due diligence is necessary in cases:

  • Sale of the business or purchase of the ready one.
  • Setting up business abroad.
  • Establishing of joint venture or amalgamation of companies.
  • Granting of solvency proofs to the foreign partner or investor.
  • Check of reliability and solvency of the counterpart.
  • Real estate acquisition abroad.

Carrying out Due Diligence is carried out with assistance of Expert council