Due diligence and its use
One of our recent newsletters briefly discussed due diligence. As it only provided basic facts, let’s have a closer look at what due diligence can be used for.
- Buying or selling. Last time, we used this example to briefly describe how due diligence is carried out. In our practice, it is the most frequent circumstance in which due diligence is demanded by our clients. And we are glad, because in the context of a company sale or purchase, due diligence increases the client’s awareness, and this facilitates decision-making and reduces risks. Last but not least, it can serve to identify potential for future improvements (after the takeover) and hence increase competitiveness.
- Due diligence need not always involve a share deal (an entire business being sold/purchased); it can only involve assets currently held by a company (asset deal).
- Financing. Due diligence can be one of the conditions required by the financing company for providing funds (such as for refinancing or investing). It is understandable that the financing partner wants to be assured that it is safe to finance this or other activities of its client or a potential client. Possible risks may be highlighted in the due diligence report.
- Verification. An example: the state administration verifies whether funds entrusted to an organisation financed by the government are managed properly and not wasted or spent on other activities for which the organisation has not been established.