Due Diligence Review

In today’s business world, due diligence is a critical factor in the success of corporate acquisitions, transactions and investment decisions. This article is dedicated to this topic to provide a deeper understanding of what due diligence means, the forms it takes and how it is effectively conducted.

Due diligence is a process that is used in a variety of business contexts. It ranges from the evaluation of startups looking for investors, to the analysis of companies considering an acquisition, to risk assessment by investors (target analysis) looking to expand their portfolio. Therefore, this process is essential to make informed, data-driven decisions and minimize business risks.

For this reason, we explain the various facets of due diligence in this article. If you have any specific questions, please contact our attorneys at LLP Law|Patent at any time. Our law firm in Munich will be happy to help you.

Definition and scope of application

Let’s start with the question of what the term due diligence actually means. Put simply, it is the careful examination of a company. As part of a comprehensive analysis, the strengths and weaknesses of the business and its risks are examined and analyzed. The focus is primarily on legal, financial and economic aspects. In addition to a comprehensive due diligence review, there are also procedures that only focus on one area of the company. An environmental due diligence audit, for example, focuses on environmental impact and energy efficiency.

The due diligence audit is primarily used for company acquisitions, but also before a company goes public and in outsourcing processes. In the context of company sales, the main aim of the audit is to determine the value of the company for the purchase price negotiations. A distinction is made between two forms of due diligence, depending on who commissions it. More on this in the following section. Our Munich law firm LLP Law|Patent is always available to advise medium-sized companies in the B2B sector, SMEs and start-ups in individual cases.

Types of due diligence checks

Buy-side due diligence is commissioned by the potential buyer. It is usually carried out after the initial contract negotiations between the seller and buyer have begun. A non-disclosure agreement is signed between the two parties before the audit begins. This is important because a thorough due diligence audit gives the buyer access to internal information and business secrets. As a due diligence review is often associated with considerable costs, the future contracting parties also record in a letter of intent that both parties have a serious interest in concluding a contract. The motivation behind buy-side due diligence on the buyer’s side is to uncover risks that could reduce the value of the company.

If the due diligence review is initiated by the seller, this is referred to as vendor due diligence. It is usually initiated before negotiations begin. This regularly happens when there are various potential buyers. An examination by the seller is more efficient than parallel investigations by several buyers. It also allows the seller to avoid unwanted surprises and enter into negotiations on a more informed basis. The disadvantage of a vendor due diligence review is that the buyer may have doubts about the objectivity of such a review. You are welcome to contact our lawyers for legal advice on due diligence. We are a long-standing contact for B2B companies in the mid-market, SMEs and start-ups in and around Munich.

Procedure of a buy-side due diligence review

Let us now take a look at the standard case of a buy-side due diligence and consider the various steps involved in such a review:

Hiring external experts

The first step is to commission experts to carry out the planned due diligence review. The buyer regularly uses lawyers, tax consultants, auditors and external experts for this purpose. If certain specialist areas are to be examined, for example the company’s IT sector, specialist consultants such as IT consultants are also used. Regardless of who the buyer commissions, it is essential to define the exact objectives of the due diligence review before it begins. What is to be achieved by the investigation? What specifically will be investigated? What data should be collected and to what extent?

Main procedure

Various methods are used in the main part of the due diligence process, the actual audit. The relevant documents are often uploaded by the seller in an electronic data room and analyzed by the external consultants. These may be internal contracts with business partners such as suppliers and customers or annual reports or register extracts that are generally accessible. The balance sheets and sales figures should also be checked and a look should be taken at sanctions lists or directories of politically exposed persons. An evaluation of press releases and media coverage can also provide insights. In addition, open questions are clarified in personal discussions with company representatives and employees. These question and answer sessions are also known as Q&A sessions.

Due diligence report

Once the review has been completed, the consultants prepare the due diligence report. It contains all the findings of the investigation. It contains both opportunities and risks that would result from a company acquisition. These forecasts make a statement about how the company can develop economically and what weaknesses there are.

On the basis of this final report, the two parties can start the contract negotiations – provided that the buyer is still interested after reading the due diligence report. In addition to the purchase price, the report can also influence which warranty claims or liability clauses make it into the final contract.

Conclusion

Due diligence provides both buyers and sellers with a solid basis for well-founded contract negotiations by providing detailed insights into the financial, legal and operational condition of a company.

For companies preparing for such an audit, it is crucial to draw on the experience of professionals such as lawyers, tax advisors and auditors. Our law firm LLP Law|Patent in Munich will be happy to answer any questions you may have.

Remember: thorough due diligence is more than just a formal review; it is a crucial step in realizing the full potential of a business transaction and avoiding unforeseen risks. If you have any further questions or need assistance, please do not hesitate to contact us. Our Munich team at LLP Law|Patent is ready to support you with knowledge and commitment to achieve your business goals.

Bild von Malachi Witt auf Pixabay