Due diligence is a comprehensive independent assessment procedure conducted to gain a full understanding of a company’s operations, financial condition, prospects, and other relevant aspects, as well as to evaluate potential risks.
Such a review may be initiated by a potential buyer of the company, its shareholders and owners, banks, or other interested parties. The due diligence process can be carried out either by representatives of the owner or the interested party or by a group of invited independent experts.
The term «due diligence» is most commonly used in financial and legal contexts.
History of the concept
The term «due diligence» was introduced into legal practice in the 1930s in the United States. At that time, it referred to a procedure where a broker disclosed information about a company whose shares were traded on the stock exchange to potential investors. By the late 1970s, Swiss bankers developed general principles for collecting information about clients, which eventually extended to legal, financial, and other sectors. These principles formed the basis for modern due diligence standards. In recent years, this procedure has gained widespread application in developed countries.
Types of due diligence
Due diligence is conducted based on the needs, specifics, and type of procedure, as well as the industry in which the target entity operates. There are no standardised guidelines for the activities to be conducted or the specialists to be engaged during the procedure.
Broadly speaking, the following types of due diligence can be identified:
- tax;
- technical;
- legal;
- financial;
- environmental;
- commercial;
- marketing, and others.
In many cases, clients opt for comprehensive due diligence, which provides the most complete and thorough insights into the target entity. The success of the procedure largely depends on the transparency of the company and the willingness of all parties to cooperate.
During the due diligence process, specialists consider information from a variety of sources, including:
- any corporate documents, reports, contracts, etc.;
- financial statements;
- tangible and intangible assets of the company;
- information obtained from competitors;
- insider data from the company’s managers and employees;
- information from registries and other open sources.
Who orders due diligence and why?
The due diligence procedure can be of interest to various market participants. It is most commonly commissioned before acquiring a company or investing in a business entity, before mergers or acquisitions, before issuing securities, during a change of top management, and in other similar situations.
The outcome of due diligence is a detailed report that provides an objective and comprehensive evaluation of the company, enabling stakeholders to make informed decisions.
