Due diligence – types and range of analysis
June 27, 2022
Due diligence is one of the methods that allows a full assessment of a company. The term started to be use in 1933 due to the adoption of the Securities Act. In Poland, due diligence is often replaced by words like “audit” or “assessment of business condition”.
Why using due diligence is important?
Due diligence is a very beneficial solution for investors, because thanks to this extensive method, people who want to invest in a company have a complete picture of it. This includes financial, legal, tax, technological, commercial aspects and more. Company data base on historical information. In this case, investors have an answer to the question whether it is worth taking the risk and start cooperation with this company, even before negotiations.
Due diligence is also of key importance for a potential seller, because thanks to the assessment, the potential seller is protected against liability for defects in the subject of the transaction.
Types of due diligence
Legal due diligence
Legal due diligence exists to dispel doubts related to a legal issue in a given company. This type of method aims to estimate findings related to employment matters, lawsuits, damages, valuation risk, intellectual property, etc. This is the basis or the beginning for further development of other types of due diligence, including financial analysis, structural analysis, operational analysis etc. Legal analysis includes all documents of a legal nature, for example claims, deeds of ownership, court orders, etc. Thanks to these analyzes, the potential investor has a picture of the legal nature of the enterprise and in this case investor is able to assess the level of the enterprise, possible further direction of the company, and also indicate following documents needed for the next analysis.
Financial due diligence
This type of due diligence is one of the most important as it shows the financial condition of an enterprise. The analysis covers financial statements, cash flow and factors influencing that. Thanks to this, it is possible to detect threats or possible irregularities. Financial due diligence secures the investor against possible negative liabilities. In general, financial due diligence is carried out after signing the letter of intent, as already at this stage a group of buyers is smaller and company’s data is limited to external entities.
Tax due diligence
This type of due diligence presents the company’s tax structure and also identifies its tax liabilities. In this case, the tax analysis consists in analyzing how and in what respect the enterprise is treated by courts, tax offices and other institutions. The result of a given analysis is verification of tax decisions made by tax authorities in previous periods and which have an impact on further development of the company. Due to the analysis, it is possible to develop an appropriate tax structure and valuation of business items in accordance with applicable legal regulations. Moreover, after completing the tax analysis, you can see and verify the compliance of declared revenues and costs of the company with values resulting from accounting records. It is worth remembering that the result of tax due diligence is essential and one of the most important as it affects the valuation. A thorough tax analysis of a company that operates on the international market is very important.
Business due diligence
Business due diligence consists in analyzing the company’s position on the market, competition strategy, the size of the market in which the company operates, customer opinions, etc. Another words, the entire economic environment, in which a given entity operates, is being analyzed.
Due diligence vendor
At this level, the company can assess its strengths, weaknesses, opportunities and threats, and the company can also prepare for negotiations at this stage.
Range of due diligence analysis
| Types of due diligence analysis | Range |
| Types of due diligence analysis | Range |
| Financial analysis | The financial analysis is analyzed on the basis of the financial statements. |
| Information flow analysis | Analysis of the efficiency of information flow and the possible identification of barriers related to its flow |
| Technical analysis | It consists in analyzing and assessing the technical condition of the technologies used by the enterprise, the state of modernity. Technical analysis also consists in improving the development of an enterprise by verifying what new technologies can be introduced. |
| Tax burden analysis | It is based on an analysis of the level of tax liability |
| Analysis of psychological and ethical-moral aspects | It is based on the assessment and analysis of interpersonal contacts and employee attitudes |
| Organization analysis | It is based on the evaluation and analysis of the effectiveness of organizational structures |
| Human capital management analysis | It consists in the assessment and analysis of the human resources structure (based on selected criteria), as well as the verification of career paths in the enterprise. |
| Real estate analysis | It consists in assessing the legal status and technical condition of the property. The assessment is prepared on the basis of the opinions of experts. |
Who carries out due diligence
Who carries out due diligence depends on the type of transaction. These can be technical experts, tax advisers, financial advisers, IT specialists, consultants etc. The ordering party of due diligence is an investor who wants to invest in an interesting enterprise.
How long does due diligence take?
Due diligence may take from several days to several months, depending on the size of an enterprise. Time consumption is also influenced by the number of specialists involved and by the acquisition of external experts. No obstacles on the way to obtain company data and blocking them from specialists and experts, significantly saves time on preparing a due diligence report.
When to consider due diligence
Due diligence is worth considering in the case of:
- Restructuring;
- Mergers of capital companies;
- Sale of the company (in whole or in part)
- Introduction the company to the stock exchange;
- Acquiring investors by the company
- Sale of stocks or shares
- Determining the specificity of the company’s operation
Author: Olena Shevchenko
Tags due diligence, range of due diligence analysis, types of due diligence, When to consider due diligence
