The Due Diligence process consists of an investigation or legal audit prior to the closing of a transaction to determine whether a company complies with its legal obligations, clarify its economic-financial situation and assess whether there are risks associated with its activity or may arise in the future.
It is a duty of care that may be a legal obligation, although it is generally performed voluntarily at the initiative of the companies involved in the transaction. Its objective? To facilitate an informed decision-making process.
Those obliged to undergo this process must develop risk-based policies focused on diagnosis, as well as measurement, control, monitoring and mitigation.
The origin of this tool can be found in the 1930s in North America, specifically in the Securities Act of 1933, which regulated the information that sellers of equity investments and shares had to provide to the U.S. Securities and Exchange Commission (SEC) in order to be able to sell their products.
It is currently contemplated at the international level, either as a legal obligation or as a recommendation of good practices in the field of compliance and auditing. In the context of an M&A (mergers and acquisitions) operation, it is essential to know the reality of the company with which the transaction is to be carried out. What is its situation? Are there any risks? In short, transparency and access to key information that can determine the fate of the process.
Benefits of a Due Diligence
- Risk management and assessment
- Analysis of the weaknesses, strengths, threats and opportunities associated with the transaction.
- Analysis of the profitability of the merger or acquisition
- Analysis of the company’s business areas
- Information of value for the negotiation (corporate, labor, contractual, financial, technological, litigation, environmental aspects…)
- Analysis of financial and fiscal viability
- Encourages transparency and ethical business
- Optimizes business processes
Keys to the Due Diligence
- Universality
A Due Diligence report can be understood in almost any jurisdiction, as the formats used to carry out the investigation are very similar. This universality is one of the great advantages of this tool, as it favors the mobility of international buyers or investors.
- Confidentiality
This is one of the cornerstones of the Due Diligence process, since all the information analyzed is confidential and must only be accessible to the team of professionals in charge of preparing the report.
The parties will sign a confidentiality agreement in which they undertake to keep secret the sensitive information they have shared, as well as not to disclose it to third parties. This agreement is of particular relevance in cases where the transaction does not close, because the parties will be obliged not to disclose and not to make use of the information they have shared.
Phases of a Due Diligence
The Due Diligence process is structured in phases:
- Planning.
- Data collection and analysis.
- Conclusions and final report.
Its duration varies depending on the complexity of the transaction and the type of companies involved, from a minimum of two weeks to three months. The Due Diligence can be performed by the company interested in the M&A operation or by an external firm. At IO-EPIK we have professionals specialized in Due Diligence within the framework of M&A operations.
An adequate planning and execution of the Due Diligence will be key for a successful negotiation in which to make informed investment decisions. From IO-EPIK we give you the answer to the needs of your initiatives or projects, our Circle of lawyers will provide you with a tailor-made EPIK-LAWYER.