Due Diligence: the key to investment decisions in company acquisitions

What is due diligence?

The main objective of due diligence is to ensure that the buyer obtains, through an investigation, a detailed and truthful picture of the different business areas of the company to be acquired.

In the economic or commercial field, due diligence represents an in-depth analysis, a verification, an evaluation regarding a potential investment and is aimed at confirming or denying all the facts, elements and circumstances relating to a given operation.

Due diligence is a research and analytical process aimed at carefully evaluating a company for significant transactions such as mergers, acquisitions, investments or joint ventures. This process aims to provide the buyer or investor with a clear and detailed picture of the target company's business model, its financial situation, growth prospects and potential associated risks.

Through due diligence, an accurate verification of the available information is carried out, helping to reduce information asymmetries and guarantee that decisions are based on concrete and reliable data. The importance of due diligence lies in its ability to prevent unwanted surprises and facilitate safer and more informed investments.

The purchasing organization forms a team made up of professionals in tax, corporate, legal and technical matters who will proceed with an in-depth analysis of the target company to be acquired to evaluate the appropriateness and quality of the investment, regulatory compliance, the real value and potential liabilities. This phase is crucial to avoid investments that are not consistent with the buyer's objective and hopefully both the potential buyer and the seller will have to commit to maintaining ethical behavior and clear and transparent communication.

When does it take place and for which operations?

Due diligence takes place following the signing of a letter of intent and before the conclusion of the preliminary contract, or after the latter. In the second case, the objective of the due diligence is to evaluate the need for a possible modification of the agreed price, both decreasing and increasing.

The length of the due diligence process may vary, depending on the complexity of the target organization in question, as well as any difficulties encountered by the team during the investigation. Generally speaking, due diligence can be completed in an average time frame of two to six weeks, depending on the specific circumstances and complexity of the case.

Due diligence can involve the entire business or focus on specific parts of it, such as a business unit, and can be used in various operations, including:

• mergers and acquisitions;
• corporate or business transfers;
• acquisition of shareholdings;
• evaluation and appraisal of properties subject to judicial procedures, sales and, in general, placed as collateral for credit exposures;
• stock market listings;
• capital increases;
• signing of joint venture contracts.

Checklist and due diligence report

The due diligence process begins with a checklist of information that the team in charge provides. Generally, information is requested regarding contracts, intellectual property, privacy, corporate affairs, taxation, labor, regulation and accounting.

If such information is not available, the company is required to provide adequate reasons to explain why irequested data do not exist or are considered irrelevant, in order to prevent any unexpected events in the final report.

At the end of the due diligence process, the team prepares a report that should provide answers to all the questions necessary to evaluate the transaction positively or negatively. The final due diligence report is an essential tool that the buyer will use to review the offer, renegotiate the price, structure the collateral and define the post-acquisition plan. It constitutes the information basis on which a conscious and well-considered decision is based.

The types of due diligence

Due diligence is a complex process that encompasses multiple aspects of a company and consequently its various typologies are specifically addressed to different areas of interest, each with its own focus and analysis methodology.

 Financial due diligence is divided into three time perspectives, examining the past to confirm the reliability of the track record, analyzing the present to evaluate operational hypotheses and projecting the future to ensure that the expected growth is realistic and not based on difficult-to-occur scenarios. This typology is integrated with the accounting and tax due diligence which examines the accounting and tax situation of the company through the analysis of the financial statements and the income statement, verifying the compliance of these documents with civil and tax regulations and ensuring that they are drawn up according to correct accounting principles. It also includes checking the regularity of accounting books and VAT registers, tax returns and any assessments carried out by the tax authorities. It is also essential to examine any debt exposures, together with a detailed analysis of the company's financial statements for the last three to five years.

Another fundamental type is legal due diligence, which analyzes the legal situation of the company, aiming to identify any legal risks associated with the company, which may concern issues such as ownership of assets, compensation claims, legal disputes and compliance with regulatory requirements, including environmental, workplace safety and food safety. Furthermore, the analysis includes the study of accessory contractual clauses and contractual relationships with employees, collaborators and credit institutions.

Corporate due diligence, on the other hand, provides a strategic analysis of the target company, exploring the sector to which it belongs, historical growth and profitability, as well as the main players, the competitive conditions and the most significant threats and opportunities associated. Corporate due diligence also deals with examining operating cycles, market trends, the regulatory environment and specific legislation, verifying the correctness of the pricing strategies and products offered by the company. This due diligence requires an in-depth analysis of the corporate structure, governance and structure of the company, identifying the beneficial owner. The search for information on shareholders and directors allows us to identify further companies connected to the subjects of interest, thus broadening the field of investigation.

Other types of activities may include reputational due diligence, environmental due diligence, cyber due diligence, real estate due diligence.

In summary, the variety of due diligence types offers a comprehensive and multidimensional view, essential for making informed decisions during the investment processtiment or acquisition.