Due diligence

What is due diligence?

«The modern economic dictionary» Rajzberga B.A., Lozovskogo L.S., Starodubtsevoj E.B. has a following definition: «due diligence (English due diligence — maintenance of due conscientiousness) — company thorough training to carrying out of transformations, realization of transaction». Sometimes for a designation abbreviations DueD, DDG are used. The given term originally was used in bank sphere and used in a case for check of partners and clients with a view of protection of bank interests. Now the given term is used for a long time concerning all-round check of the company, the investment project or other object of the preparing transaction from the point of view of enterprise safety of participants of the transaction and first of all the buyer (investor).

At the present time due diligence or legal audit, becomes an everyday occurrence in domestic business. However when investment projects have the international character due diligence becomes not only possible, but a compulsory procedure. Certainly, the mentioned service is not claimed widely in Russia as on the West, but today the buyer (investor) is even more often ready to order the given type of service to be assured of necessity and efficiency of the concluded transaction.

What risks to estimate the due diligence directed to?

Legal audit urged to decrease or avoid possible, economic, financial, administrative, marketing and legal risks, in particular:

  • the tax risks connected with tax planning, fiscal administration and tax optimization;
  • the risks connected with order and level of keeping the accounting, tax and administrative registers;
  • the risk of loss of property and other assets, due to the defect of the rights, judicial lawsuits, requirements of creditors, invalidity of transactions and other reasons;
  • the risk of overestimation of a project cost;
  • the risk of possible corporate conflicts, including possibility illegal capture and absorption;
  • the risks of tax, administrative, civil-law and the criminal responsibility of the company, its heads and owners;
  • the administrative risks connected with management quality, system of document circulation, the internal control etc.

How to perform due diligence?

As a rule, due-diligence is performed in four basic directions:

  • the estimation of the company, property, securities and other objects of the transaction;
  • check of the accounting, administrative and tax registers, the financial analysis;
  • legal consulting;
  • the analysis of level of management.

The listed directions can be combined and supplemented differently with other facultative directions, for example, an estimation of position of the company on the market, its business reputation, etc. (Marketing due diligence) or an estimation of the crisis phenomena at the enterprise from the point of view of prospects of anti-recessionary management.

During the legal audit check both quantitative, and quality indicators is taken into account: presence of property and other assets, the financial data, quality of administration, documentary registration of all operations etc.

The time terms of due diligence depends on quality of object and volume of work and can take from a week to about a year.

Cleanliness and business transparency is a competitive advantage and a trust basis between partners.