Due Diligence

Due diligence term in a literal sense means conducting a research (investigation) with a desired meticulousity and finds application mainly in the legal fields. Nevertheless, together with increase of the international capital flow DD becomes a term which is more and more often used in the field of economics.

The DD procedure becomes and intangible element of strategic capital transactions, a tool which allows the parties to identify the risks connected with these transactions and identifying potential synergy effects.

Carrying out due diligence procedure is treated as a symptom of consideration on the side of investors and is usually a phase preceding the valuation of the enterprise being a subject of sale-buying and generally (DD is) a phase preceding any investment related decisions, being foundation of them. Sometimes DD is wrongly equated with a standard audit or defined as a review of accounting books done for potential investors. However, the scope of a standard DD is much wider, and most often it includes the following issues: financial analysis, legal analysis, technological analysis and organization analysis.

CDE carries out both limited and full scope of DD, according to the client’s preference, taking into the account requirements of the parties taking part in transaction.

Full scope DD includes following fields:

  • market and general economic – the aim is defining the market position and perspectives for enterprise development,
  • financial — including the basic data from the financial statements, taking into the acount the balance sheet items and profit and loss statements and money flow, as well as additional information and information about changes in the equity and additional clarifying notes,
  • legal – including the history and current legal status of the company, property rights, including intellectual property rights, legal analysis of the main contracts, relevant legal adjustment, licenses, adjustment fees, impositions and penalty fees paid by a company, legal proceedings in court going on and assets involved; disputes with the government, including the customs office, local authorities, monopolies and mergers commissions and other.
  • Examining real estate — this is usually a critical point of the transactions. Hence it is a rule, that they are analyzed in detail. Property appraisers or companies which specialize in real estate DD are involved in that procedure, checking the legal status and all other features of the real estate in question.
  • Tax — DD comes in two main variant regarding the taxes; simplified and full scope:
    • limited (simplified) scope DD, in which only the examined side’s confidence is checked (e.g. whether all of the income tax returns were filed and settled before the deadlines, what were the results and recommendations of the tax control etc.),
    • full scope DD, in which detailed tax status of the company is presented, including the income and tax credits of each and every form of tax,
  • Human Resources management – taking into account the analysis of the personnel structure of the company, number and structure of the employed within the scope of education, skills, competence, age, compensation packages etc.,
  • Technical (Technological) – directed at assessment of technological level and production potential,
  • Organizational — identifying the organizational structures and their effectiveness,
  • Psychological and ethical – directed at the interpersonal relations sphere and the corporate and ownership bases,
  • Informative – directed at assessment of efficiency and effectiveness of information gathering and flow, and at identifying all the obstacles and abnormalities in this field.

The results of DD process are presented in a form of Due Diligence Report. This report most of all considers:

  • review of the current market position of the company,,
  • expected path of market development for the next couple of years and expected market position of the company,
  • financial expectations for the company for the upcoming 5 years, taking into account detailed investment program,
  • assessment of the net book value
  • estimation, using the multiples method, of the company’s market value.