Due diligence of the company. What is it and why is it needed?
What is due diligence?
Due Diligence in English means checking a business, a business partner before buying a business or merging. In other words, due diligence is a procedure, a set of measures aimed at identifying dangerous moments in a transaction. The parties to the transaction can thus foresee all possible legal consequences of the transaction.
When is due diligence required?
- Purchase of a ready-made business;
- Investment;
- Acquisition of any assets;
- The company entered an IPO.
As part of due diligence, a comprehensive business audit is carried out. It includes checking the founders, obtaining information about the ongoing bankruptcy processes, about the presence of debts to creditors. For IT projects, it is especially valuable to check the legal purity of the exclusive rights to the transferred software products. All this takes place within the framework of the Due Diligence process.
Due diligence types
If we talk about the acquisition of an asset, a due diligence of the asset is required, affecting all areas of activity. Therefore, there are several types of due diligence:
- Accounting audit;
- Financial due diligence;
- Organizational review;
- Tax audit;
- Legal check.
Due diligence affects all parties regarding the legal risks of the transaction. All the necessary documentation is requested and checked, counterparties are checked and all the processes regarding business activities are clarified. For example, the following are checked:
- all assets and the legality of their ownership;
- the legality of the company's activities;
- how the legal relationship with contractors is fixed;
- verification of a legal entity for the availability of the necessary constituent documents;
- relationship with government agencies.
The timing of the audit may vary depending on the scope of the pending audit. A large-scale due diligence can take from one to two months.
Based on the results of due diligence, a report is drawn up, which contains information on the actions taken, violations detected, the legal justification of the aspect of the company's activities, information about the company's property, the scheme of property ownership.
Who needs due diligence?
The due diligence procedure is recommended for everyone who plans to invest their money in a business or another asset in any way, regardless of how the asset is purchased. Due diligence includes comprehensive asset research.
By performing due diligence, you get rid of:
- Risks of investing in a problem asset;
- Having problems after purchasing an asset.
Due diligence is an extremely important stage that needs to be carried out when buying an asset. Due diligence will allow you to invest your funds as efficiently as possible, as well as preserve and increase them. If you still have questions or are faced with difficulties in conducting due diligence, A4 Law Firm lawyers will carry out the most complete check for you and give their professional opinion.
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