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 diligenceaccounting and tax due diligence

Another fundamental type is legal due diligence

Corporate due diligence

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.