A Due Diligence is a vitally important measure to reduce the risks involved in deciding to buy a business, join as a partner, acquire real estate properties, invest in financial products, or participate in investment vehicles, among other commercial transactions. In many cases, the investor does not properly analyze the investment, nor determine the risks and threats or the weaknesses and contingencies. He decides to invest based on personal factors, friendship, emotional relationships, intuition, or experience, and ends up doing so without having the necessary information and documentation, occasionally generating significant money, time, and energy losses, that could be avoided through a Due Diligence.

The Due Diligence is a global analysis of the company or investment to be made, from a legal, tax, labor, financial and / or business point of view, by which the main documentation and information of the company in which you want to invest is collected and analyzed in detail, in order to determine the general state of the business, whether it complies with its legal obligations, what risks and contingencies it has, either internally, in its relationship with its employees, or externally with its customers or suppliers, which aspects generate a competitive advantage and which do not, their future projection, evolution and in general, advantages and threats, strengths and weaknesses the proposed investment has.

With these conclusions, resulting of a careful examination of the available documentation, regulations, contracts, deeds, financial statements, business plan and countless other documents, an exhaustive report is made available to the investor, the Due Diligence, which describes the situation of the company and, especially, the potential contingencies that may be encountered at the time of making the investment.

Although there are an infinite number of different cases, a standard Due Diligence process involves the following steps:

  1. The seller of a company initiates discussions with potential buyers, either directly or through specialized professionals.
  2. If a buyer has an interest in the acquisition, a confidentiality agreement is signed to preserve the secrecy of the information to be provided and, if the conversations are already at a more advanced stage, a letter of interest (LOI) to make the investment is formalized.
  3. If the negotiations between both parties progress favorably, then a MOU (“Memorandum of Understanding”) is formalized setting out the characteristics, form and conditions of the investment and / or the agreements between them are established.
  4. A Due Diligence of the company is then agreed upon to determine what risks and contingencies may arise from the investment, which is usually performed by law firms or specialized consulting firms.
  5. First, a Virtual Data Room or access point is created, usually digital, where the seller submits the documentation required by the buyer’s advisors.
  6. The advisors carefully analyze this information and carry out recurring conversations with the seller, through their advisors, so that they can make the necessary explanations about the information, resolve doubts and formulate the appropriate conclusions.
  7. Once the documentation has been analyzed, a Due Diligence report is prepared in which the situation of the different areas of the company and the main contingencies, risks and threats are presented, all from a legal, tax, labor, financial and / or business point of view, as the case may be.
  8. Based on the conclusions of the Due Diligence, and already having an objective and detailed analysis of the transaction, the buyer may decide to carry it out with the foreseen conditions, not to make it or to modify the terms of the negotiation with the seller, since important aspects have arisen that condition or limit its investment decision, such as, for example, the existence of pending lawsuits, workers’ claims, debts, non-payments, or even criminal acts.
  9. If these cases, it is common for the buyer to lower the purchase price and / or require the seller to provide representations and warranties, i.e. that the seller assumes liability for any breach of its legal obligations, litigation, customer or supplier claims, non-payment or any other contingency that has been detected.

Relying on the examination carried out thanks to the Due Diligence, the buyer can make his investment decision based on objective facts, knowing the reality of the company and the contingencies it presents, improving his negotiating position with the seller, minimizing the risks derived from the investment and, in short, avoiding scares, frustrations and unnecessary loss of time, money and energy.

Our article in Spanish.

Oriol Giró Canturri

Emindset Law Managin Partner


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