The conventional phrase “Due Diligence”, literally referred to as “Due Care” or “Due Attention” is popularly used in the corporate finance context to denote the overall audit of company activity, as well as separate audits of other components of business including Organisational analysis, legal, tax, financial, business affairs in preparation of a possible transaction.
A thorough due diligence investigation is particularly important in the case of an initial public offering in view of the lack of a substantial publicly available information about the issuer. Thorough due diligence before an initial public offering provides significant defenses.
The due diligence process aspires to achieve the following:
Depending on the purposes which the due diligence is ordered for, while at the same time retaining general and principal approaches, a due diligence procedure has its own peculiarities. While revealing hidden problems, various legal and technical angles have to be looked upon keeping in preview the long term vision of the organization.
The elements under investigation or inspection would cover: —
Firstly an organizational analysis is conducted which include assessment of the structure of the business, its transparency and controllability and also any unjustified cross holding or other structural drawbacks that may cause anxiety and decrease the business’s value are revealed and eliminated.
The second aspect to be considered is legal issues arising during company activity. Legal due diligence covers the legal aspects of a business transaction, liabilities of the target company, potential legal pitfalls, and other related issues. Legal due diligence covers intra-corporate and intercorporate transactions.
It includes preparation of regulatory checklists meeting with personnel, independent check with regulatory authorities etc. apart from document verifications. Besides, one shall detect basic encumbrances of significant property. The system of basic contractual and economic relations, as well as licenses and permits providing for the functioning of a business, is subject to consideration during legal due diligence.
The third aspect of the report drawn by the results of due diligence is finances and taxes. One shall reveal the main issues related to financial flows, volumes of accounts receivable and payable, define cost and profit centers inside the group of companies, as well as the correct payment of taxes and risks related to possible claims on the part of management.
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