Enterprises that plan to develop dynamically and increase their competitiveness form a model business based on corporate values. Today’s hypercompetitive environment with rapid growth, efficiency and radicalness of corporate changes causes the need to find the most profitable business models. So, in this article we will discuss the essence of due diligence and how tools that helps to make the process easier.
The purpose of due diligence
All over the world, M&A deals are used to increase the shareholder value of the company by achieving a synergistic effect on economies of scale. They serve as a means of growth and diversification of activities, exit to new markets, attracting new customers, access to new resources, obtaining unique competitive advantages. At the same time with the unconditional potential to increase shareholder value, the success of transactions is not at all guaranteed.
According to many experts, the reason unsuccessful deals lies in insufficient attention to due diligence. The process should be aimed primarily at confirming the strategic rationale for the transaction and the assumptions regarding the value creation as a result.
Thus, due diligence has two definitions: first, it is a risk assessment and opportunities associated with the perceived transaction, and second, the standard of due diligence required in certain transactions. In both cases, due diligence is a study of the accuracy of information related to the upcoming investment or decision, and an assessment of the future potential of the deal.
The due diligence process covers many areas of activity of the company – the so-called areas of verification: the strategy surrounding, law, taxes, finance, personnel, goods, information technology, market, services. These areas are investigated within the framework of in-depth due diligence:
- financial due diligence – audit of historical, current, planned assets and the financial situation of the company;
- strategic – evaluation strategic, market, competitive position of the company, its potential, possible synergistic effect of the merger;
- technological– evaluation the technological position of the company, especially the need for future investments, including the IT environment;
- legal – legal research of a company, in particular important contracts;
- due diligence of the environment – assessment of potential environmental risks;
- due diligence of the staff – risk assessment, personnel, especially legal review of labor agreements and existing social plans;
- tax due diligence – assessment of potential tax risks, both inherent and possible in the transaction.
How useful is Data Room in due diligence?
The most effective way to communicate with the investor is a pre-prepared package of documents, which is submitted through the Virtual Data Room. This is an IT solution, the use of which allows the investor to present in advance all the necessary documentation in electronic form, segment it, analyze weaknesses, eliminate errors, and be ready to attract financing or investment agreement. Information about the object of research in data room due diligence is provided for reading and viewing for a limited period of time.
There are two types of “data rooms” for due diligence: traditional (access to a physical room with materials on paper) and virtual (access to Internet portals with documents in electronic form). The virtual “data room” is preferred for ease of access, time, and cost savings.