Due diligence is well known to those who, by the nature of their activities, are faced with audit and consulting services – business owners, company executives, and employees of consulting firms themselves.
What Is Due Diligence and Why Is It Needed?
In practice, situations often arise when the head of a commercial enterprise needs to know the opinion of qualified lawyers about the legal component of his business. Therefore, there is a need for a legal audit to avoid possible negative risks in doing business. Due Diligence is aimed at the early detection and prevention of conflict situations, as well as situations that can lead to significant financial losses.
In world practice, due diligence is a very common procedure since the requirement for transparency when interacting with a partner is one of the main ones in serious business. Every company that intends to carry out any transaction wants to be sure of its reliability and profitability. Such confidence can only be based on complete and reliable information about a potential partner. Its collection is carried out in the process of due diligence.
In general, the due diligence procedure is a set of measures that is necessary to identify dangerous moments in a transaction. Both counterparties check the consequences of the transaction and whether it is possible to minimize the risks. Including whether one of them is facing bankruptcy, what is the amount of debt to creditors, etc.
Today, this is a set of measures aimed at collecting and evaluating objective information about the asset being sold by specialists in order to identify possible risks for participants in such a transaction. This is an indispensable procedure when making mergers and acquisitions, creating a joint venture, selling/buying a “business,” acquiring real estate, etc.
Which Are the Best Practices for Remote Due Diligence?
At present, the due-diligence procedure has ceased to be a check peculiar only to the banking sector. More and more companies are applying for a comprehensive business analysis service from the point of view of financial analysts, auditors, and lawyers.
Due Diligence is conducted by stock market analysts, fund managers, broker-dealers, individual investors, and companies that are considering acquiring other companies. Due Diligence by individual investors is voluntary. However, broker-dealers are required by law to due diligence a security before it is sold. Due diligence allows the seller and the buyer to reach an optimal agreement. The best effect is achieved through well-coordinated work. The work done is expressed in the following documents: a report on the valuation of an enterprise (business) or a share in it.
By working with the best practices for remote due diligence, you can gain:
- Flexibility of approaches to solving problems and taking into account the existing corporate culture;
- Readiness for resistance of the client’s personnel (especially in the course of financial investigations);
- A clear focus on results, when a problem and a solution go together, and there are no open questions.
Business security requires a professional and comprehensive approach, which can be ensured by the consistent application of due diligence. Whether the founders and executives own a significant share of the shares and whether they have sold shares recently is an important factor in due diligence. A high share of top management is a plus, while low ownership is a wake-up call. Shareholders tend to get more favors when those who run the company have a vested interest in the return on the stock.