It appeared relatively recently, which is largely explained by the intensification of investment processes at the global level and increased integration into the world economic space.

Let's consider generalized information about due diligence presented on the websites of leading foreign and Russian auditing and consulting companies.

EY: Professional due diligence allows you to analyze internal documentation and other company reports to determine financial trends. Due diligence takes a deep dive into the quality and sustainability of earnings by examining underlying risks and historical financial performance to determine whether it is reasonable to expect continued operations and to understand how changing circumstances and trends may affect the company's future. PwC: Due diligence can be carried out to identify transaction failures, to obtain a better analysis of the financial position, to establish a framework for negotiations in the transaction process, to assess synergies, expectations and risks. KPMG: The purpose of due diligence is to assess the key issues facing the company being acquired and to confirm the investor's correct understanding of the company's business. Deloitte: Paying attention to up-to-date information about the value and potential risks of the target company can improve the chances of a successful transaction. Thus, due diligence is very important in assessing risks and matters of compliance with legislation, as well as conducting tax and financial planning, determining future cash flows, and identifying hidden costs. Financial expertise: The main goal of Due Diligence is to form a complete picture of the real financial condition of the enterprise and all the risks that can significantly worsen the financial condition of the enterprise. Rosexpertiza: Due diligence - pre-investment examination of companies.

Elements of similarity between due diligence and audit

The audit and due diligence methodology is based on the unity of analysis and synthesis of financial and non-financial information, studying indicators in interrelation, and tracking their further development. The methods used by specialists during the procedures are identical. At the same time, within the framework of an audit, methods are used to obtain audit evidence that confirms the auditors’ conclusions regarding the reliability of the accounting data on the basis of which the financial statements of the audited organization are formed. Within the framework of due diligence, attention is focused on analytical procedures and forecasts in order to identify risky areas of activity of the company under study.

When conducting compared procedures, specialists consider both financial and non-financial information as an information basis. The measures of the analyzed information are the same.

When analyzing data as part of an audit and when conducting due diligence, the financial year is taken as the reporting period.

The key role in carrying out the compared procedures is assigned to professionals - certified auditors. As part of due diligence and audit, experts from different fields can also be involved, which is determined by the specifics of the proposed investment research.

The time required to complete the audit and due diligence procedures can vary from two weeks to one year, depending on the scale of the audited organization’s activities, as well as the objectives of the audit.

Differences between due diligence and auditing

The essence of due diligence is to conduct an investment study, based on the results of which the investor receives from experts a comprehensive report reflecting conclusions about current and potential risks that could have a significant impact on the planned transaction related to capital investments.

An audit is a form of independent financial control and performs an important public function by assuring all interested users of the reliability of the state and performance of companies reflected in financial statements.

When performing due diligence, strict adherence to the principle of independence is not required, unlike auditing, for which independence is recognized as a key condition.

The range of users of the audit results is much wider: unlike a comprehensive due diligence report, which is intended for a specific investor, the audit report can be presented to all interested users (both internal and external).

Auditing has a long history. As for the due diligence procedure, this is a relatively new type of professional activity. In world practice, mention of this type of analytical activity dates back to 1933 in the Law on securities ah USA.

Let us present the results of a comparative analysis of due diligence and audit procedures in the form of a table

Comparison criterion	Due diligence	Audit
Essence	Examination of the purity of the proposed transaction as part of the decision-making process on effective and less risky investment of capital in order to preserve and increase it in the future	A type of management activity that boils down to independent financial control of accounting and assessment of accounting (financial) statements
Object	Financial and non-financial information of organizations necessary to conduct investment research	Accounting (financial) statements of organizations and reflection in them of the final production and economic activities of organizations
Subject	Experts of the working group (certified auditors, lawyers, appraisers, tax specialists, marketers, etc.) working in auditing and consulting companies	Certified auditors, consultants, tax specialists working in auditing and consulting companies, as well as individual auditors
Item	Identification of risk areas (based on financial and non-financial information) in the activities of organizations for effective investment of capital	Reliability of accounting (financial) statements of organizations
Target	Minimizing the risks of investing capital to preserve and increase it in the future	Expressing an opinion on the reliability of the accounting (financial) statements of the audited entity based on the results of an independent audit of such statements
Methodology		Comprehensive, system analysis
Functions	Systematic, informational, comprehensive analytical, research, innovative, evaluative, preventive	Control and evaluation, advisory and advisory
Principles	Honesty, objectivity, integrity, confidentiality, ethics, future orientation, professional competence	Independence, honesty, objectivity, professional competence, integrity, confidentiality, professional conduct
Historical aspect	Mention of the procedure dates back to 1933.	Auditing activities has a centuries-old history, the first mentions of audit appeared in Ancient Egypt and Ancient China as a tool for controlling state income and expenses
Regulatory regulation	Agreement of Swiss banks on due diligence standards (The Swish Bank's Due diligence Agreement), EU directives on due diligence, no national professional standards	MSA, FPSAD, FSAD, Law No. 307-FZ, Code of Professional Ethics for Auditors
Mandatory requirements	Proactively when deciding to invest	Law No. 307-FZ
Species	Due diligence when purchasing shares, due diligence when purchasing an asset, due diligence during mergers and acquisitions	External audit, internal audit
Types	Accounting, information, marketing, tax, legal, financial, environmental	Initiative, obligatory
Users	Potential investors	Owners, potential investors and other interested users
Degree of openness	Confidential for potential investors	Open to all accounting users
Materiality	Assessment of the potential risk for a transaction with capital in monetary terms	The maximum permissible amount of an erroneous amount that can be reflected in the financial statements and considered as immaterial or not misleading to users
General overview of the stages	1. Preparation: conducting negotiations between the investor and experts, with representatives of the target company; preliminary express analysis, holding a round table and concluding an agreement of intent; determining the scope of work; conclusion of a contract. 2. Planning: drawing up a plan for conducting due diligence; determination of due diligence programs in areas; preparation of a checklist. 3. Completion: implementation of planned due diligence procedures; identification, assessment and analysis of risks in the areas of due diligence; preparation of individual reports; preparation of a comprehensive due diligence report; holding a working meeting on the results of the examination	1. Preparation: drawing up and sending a letter about the audit; conclusion of an audit agreement; conducting a preliminary analysis in order to understand the activities of the audited entity; risk assessment. 2. Planning: preliminary planning; preparation and compilation general plan audit; preparation and drawing up of an audit program. 3. Completion: collection of audit evidence; preparation of the audit report; holding a meeting on the results of the audit
Meters		Natural, conditionally natural, cost, labor
Techniques and methods of implementation		Observation, queries, confirmations, recounts, tracking, surveys, analytical procedures, etc.
Degree of accuracy	Approximate estimates, forecast data	Taking into account materiality
Time orientation	Future-oriented, offers a forecast	Focused on the past, confirms accomplished facts
Result	Submission of a comprehensive due diligence report	Presentation of the auditor's report
Report form	Not regulated, a comprehensive report to the investor based on the results of an examination of the purity of a capital transaction	Regulated by FSAD 1/2010
Responsibility	Regulatory document No.	FSAD 1/2010
	Currently, when conducting investment research, the responsibility of the parties is determined by the terms of the contract
Risks	There is no unified classification; they are identified during the examination process	Audit risk, inherent risk, error risk, internal control system risk
Inspection period	From two weeks to a year	From two weeks to a year
Reporting period	Fiscal year	Fiscal year
Utility	Obtaining justification for making a decision on a less risky investment of capital in order to preserve and increase it in the future	Confirmation of the reliability of financial statements for further adoption of various management decisions

Thus, we can conclude that there are similarities between due diligence and audit (methodology and methods, information basis and its measures, members of the working group and the period of the procedure, the accepted reporting period), but there are much more differences, therefore, the procedures cannot be identified.

Basic Concepts

Due Diligence procedure - formation procedure objective presentation about the investment object (IO).

In relation to business activities, the term Due Diligence means a system of analytical and operational measures aimed at comprehensively verifying the legality and commercial attractiveness of the planned transaction, investment project.

Initially, the term Due Diligence came into the consulting business from banking practice and generally meant a system for collecting and analyzing information about potential or existing clients and partners collected by banks in order to protect their property from possible damage, incl. bank reputation.

The foundations of Due Diligence were laid in Switzerland, which is due to the historical practice of holding assets in Swiss banks.

Due diligence is a systematic procedure for purchasing a business. Due diligence collects and analyzes information for both the buyer and the seller in order to determine whether or not to proceed with the proposed transaction. The information obtained relates to all aspects of the acquired business.

Due diligence takes into account both quantitative indicators and financial data, as well as qualitative indicators, such as an assessment of existing management, internal processes and procedures, licenses available, location and rights to occupied premises.

The concept of "due diligence" first came into general use after the passage of the US Securities Act in 1933. The law provides protection to brokers when disclosing to investors commercial information about the securities they are purchasing.

If, during the due diligence procedure of a company whose shares are traded on the stock market, brokers provided information to the investor, they are not responsible for failure to provide information that could not be disclosed during the research process.

The term “Legal audit” only partially reflects the essence of Due Diligence, since a thorough examination of the proposed transaction in practice also implies:

• feasibility study
• marketing research
• analysis of documents and information for their reliability
• carrying out a complex of operational and reconnaissance activities, etc.

The depth of the inspection depends solely on the wishes of the client’s goals.

Now this procedure is widely used in mergers and acquisitions.

Why is this procedure needed?

An assessment of the benefits and liabilities of a proposed transaction is carried out by analyzing all aspects of the past, present and projected future of the acquired business and identifying any possible risks. Lack of due diligence can result in poor financial results after a change in ownership, lawsuits, tax and financial audits, and other more unpleasant consequences. It is known that a decrease in the welfare of companies that acquired a business and frequent lawsuits against them is an inadequately carried out due diligence procedure.

The due diligence procedure begins from the moment when the buyer begins to plan a possible purchase (absorption) of the investment object. The study of the company’s activities begins, the search for any information about the company, as a rule, through official sources (Internet sites, publications in the press). Searching, tracking and analyzing information is carried out to determine the value of the company and interest in its acquisition.

The duration of the due diligence procedure takes from several weeks to a year, depending on the structure and size of the business.

The costs associated with hiring appraisers, lawyers, auditors, financial analysts and other specialists should in no case be a reason for refusing to conduct high-quality due diligence, since such savings can lead to the loss of larger resources.

Thus, the goal of the due diligence procedure is to avoid or minimize existing business risks (economic, legal, tax, political, marketing), in particular:

• the risk of acquiring a company (block of shares) at an inflated price;
• the risk of non-fulfillment of obligations by the debtor enterprise;
• risk of loss of property, money;
• risk of harm (loss), incl. intangible assets, for example, business reputation;
• the risk of initiating litigation and their adverse consequences;
• the risk of seizure of property or application of other interim measures;
• the risk of the transaction being declared invalid;
• risk of foreclosure on property, securities (shares);
• the risk of being brought to tax, administrative or criminal liability;
• risk of corporate conflicts (takeover, takeover, litigation);
• risk of loss of intellectual property (trademark, industrial design, invention, know-how, commercial idea, business plan, etc.);
• political risks and the risk of loss of administrative resources (changes in legislation, change of officials on whom the success or stability of the relevant project depended, criminal prosecution);
• the risk of unfair actions of competitors (collusion with counterparties, initiation of “custom” tax and operational audits, pricing policy, lobbying interests, etc.);
• the risk of non-receipt or loss of relevant permits, licenses, approvals, etc., on which the project, transaction, etc. depends.

Both parties are interested in the objective and competent conduct of these procedures: both the investor (buyer) and the party attracting investments (seller).

What do analysts do?

The task of the Due Diligence procedure is to form an independent objective view of:

• On the market value of shares of the investment object (IO);
• About the real financial condition of the Organization;
• About the risks that may worsen the financial condition of the organization.

Conducting an independent assessment of the state of affairs is a necessary procedure when changing the owner of an object, since it allows you to establish a certain trust between the parties to the transaction, based on the conclusions and recommendations of experts, and find the necessary compromises to overcome a possible conflict of interest.

In the process of conducting the due diligence procedure, both quantitative indicators and financial data, as well as qualitative indicators are taken into account: an assessment of existing management, internal processes and procedures, the cost of licenses, location and rights to real estate.

In the process of Due Diligence, as a rule, work is performed that can be divided into three interrelated parts:

o assessment of the value of a block of shares (value of a property complex, value of a business).

o assessment of the accounting system and reliability of reporting and financial analysis; tax risk assessment;

o legal assessment of risks from obligations and completed transactions.

At the same time, appraisers, auditors and lawyers work in close cooperation, since complete information on a transaction can sometimes only be provided through joint efforts.

Limitations and assumptions for due diligence.

When conducting due diligence, the consultant proceeds from the following assumptions:

1. It is assumed that there are no hidden factors directly or indirectly affecting its results, and for the purposes of this Report, such factors are understood as circumstances, information about which is intentionally or unintentionally hidden by the Company’s employees, persons affiliated with it, or circumstances, information about which destroyed or otherwise unavailable for review.
2. The information about the Company used in the research is accepted as reliable and comprehensive, while the owners of its sources are responsible for the accuracy and completeness of such information.
3. Information about the Company does not contain confidential information that constitutes official, commercial, state, personal or other secret protected by law.
4. Information about rights to the Company's assets is assumed to fully comply with the requirements of the legislation of the Russian Federation and other regulations, except for cases where this Report directly states otherwise.

When conducting due diligence, the Consultant establishes the following restrictions and limits of application of the obtained research result:

1. The consultant is not responsible for searching for hidden factors that directly or indirectly influence the results of the study.
2. Information about the Company can only be obtained voluntarily from its employees or persons affiliated with the Company, as well as from open sources of information.
3. Information about the Company may not contain confidential information that constitutes official, commercial, state, personal or other secret protected by law, and the Consultant may not be aware that he has been limited in access to such information on the specified grounds.
4. When conducting the research, data on facts that occurred or could occur during a time beyond the due diligence period established in the Terms of Reference are not taken into account. The exception is cases when the following conditions are simultaneously met: (a) information about such facts became known to the Consultant and (b) in the opinion of the Consultant, information about such facts is of significant importance and should be brought to the attention of the Client.
5. The results of the study are valid solely as of the date as of which due diligence is carried out, except in cases where this Report expressly states otherwise.
6. The results of the study cannot be used otherwise than in accordance with the goals and objectives set out in the Agreement between the Customer and the Consultant and the Terms of Reference thereto.
7. The research results contained in this Report, including conclusions and recommendations based on them, refer to the professional opinion of the Consultant’s Specialists, formed on the basis of special knowledge in the field of jurisprudence and existing experience in similar work.
8. The Consultant is not responsible for decisions that were made by the Customer based on information about the results of the study, as well as for the consequences that arose due to ignoring the results of the study.
9. The Consultant is not required to prove the existing or absent rights of the Company to its assets, as well as the rights of third parties to the Company’s assets, and obligations in relation to them.
10. The consultant, using information about the Company during research, does not certify the facts indicated in such information.

Basic rules for conducting due diligence procedures.

Creation of a qualified due diligence team

1. Selection of a professional team of consultants

Typically, the buyer engages consultants and experts to carry out the due diligence procedure. At a minimum, the due diligence team should include valuation, legal and finance/accounting personnel. It may also include economists, engineers, and security specialists.

In Russia, the mergers and acquisitions market is quite specific. Companies that are candidates for sale (acquisition) are, as a rule, companies specializing in specific areas of the economy: oil and gas, metallurgy, telecommunications. "Due diligence" of this kind of companies necessarily requires special knowledge (technical, economic, etc.).

The more qualified the due diligence team is, the more adequate and accurate the future report will be, and, accordingly, the fewer problems that the buyer may encounter in the future.

2. Statement of technical specifications

A good due diligence procedure should begin with the preparation of a comprehensive, detailed technical specification for the conduct of the due diligence procedure.

The terms of reference for conducting the due diligence procedure must be drawn up by the investor - the customer of the work with the direct participation of the performer - the due diligence team. This is necessary because the investor sometimes has questions related solely to the conduct of the business, and only the investor knows exactly what he expects from the acquired company.

The terms of reference should highlight the most important areas of the proposed transaction (composition of assets, price, history of the acquisition of the company, debt, owners, etc.).

Consultants will try to request only those documents that this type of company should have. Sellers are left unhappy when a buyer requests information that requires the seller to prepare new documentation.

Possible problem

In practice, it is difficult to concentrate all the items and questions in the first checklist, and additional queries become necessary. This irritates the seller and delays the process. To avoid this problem, before preparing the questionnaire, members of the due diligence team try to conduct preliminary research in order to know exactly the specifics of the company's activities and possible pitfalls.

3. Negotiations and interviews with the seller

The investor should obtain information not available in the documents through negotiations and interviews with the seller's officials. This is an important part of due diligence. Such negotiations should take place in a friendly and unobtrusive atmosphere. In doing so, we proceed from the understanding that we're talking about about a friendly purchase (takeover).

Possible problem

In practice, there is a situation when the seller is not ready to work (read - let anyone into the enterprise) except appraisers. The argument is that too much important information can be obtained by lawyers and auditors, who will be allowed access to all the documentation of the enterprise. Subsequently, this information can be used against the enterprise and a friendly takeover - the purchase can turn into a hostile one.

There are no tips here, everything is decided by the level of interest of the parties and their relationships.

4. Preparation of documents and places of work with them by the seller

To make your work easier and save time, it is very important to have everything necessary documents in one place, in a special room. It is desirable that such premises be located on the seller’s premises. This makes it easier to search for documents, makes it possible to ask staff questions and negotiate, and also allows the seller to somehow control the process of working with documents.

The room should be maximally equipped with all necessary equipment: telephone, fax, printer, copy machine, Internet. It is important that every member of the due diligence team has constant access to this room at all times.

5. Necessary and sufficient information (documentation)

No less important in the due diligence procedure is the verification of intra-company transactions: any contracts concluded by the company (pledges, loans, contracts, leases and other civil contracts), including any letters of intent, transfers cash, a proposed public offering (IPO).

It is important for the consultant to determine what information is necessary for verification, and at what level the analyzed data can be neglected.

A thorough analysis of legal risks in relation to the company, verification of intellectual property rights, issues of antimonopoly legislation, and environmental protection are required.

In doing so, legal counsel must determine which legal claims are significant, which is, of course, relative. Those. a million dollar claim will have little meaning in the context of a $1 billion deal, and vice versa. Many international law firms consider $250,000 to be a reasonable materiality threshold. In the Russian market, analysts consider the threshold of materiality to be $100 thousand.

Some claims deserve close attention, regardless of their amount. For example, a product quality claim will require special attention. When assessing the costs of potential risks, companies should also consider out-of-court settlement.

6. OBTAINING CONFIRMATION FROM GOVERNMENT AUTHORITIES

To fully understand the status of a company, you first need to make sure that it was created in accordance with the law and continues to exist.

To do this, the statutory (constituent) documents of the company and any changes to them, for example, a change of name, are studied. Constituent documents must be verified in the original or in the form of notarized copies. It is necessary to obtain official confirmation from the registration authority that the company is properly registered and all existing changes have been correctly accepted and registered.

It is also advisable to obtain confirmation from statistical authorities, the tax committee, the land committee, the real estate center, the financial supervision agency, as well as from licensor authorities.

To obtain supporting information from government agencies It is imperative to have a power of attorney from the seller to receive such data.

To fully complete this stage of the due diligence procedure, the buyer must check the current licenses for the company’s activities, relevant certificates of registration as a taxpayer and registration with statistical authorities, certificates of state registration issues of shares, reports on the results of securities placements, documents confirming payment of the authorized capital.

Report preparation

After studying and analyzing all the information and conducting interviews, a report on the due diligence procedure is compiled. Since specialists from three areas take part in the work - appraisers, lawyers and auditors, 3 reports are usually prepared. For ease of perception of information, the most essential information is summarized in a separate presentation.

Presentation of the results of the work of specialists who worked in the due diligence team allows the investor making a purchasing decision to focus on the main thing. The investor's authorized representatives can also analyze the reports in detail.

The report is prepared in writing, in accordance with current federal legislation and standards. Presentation - in electronic and paper form.

Common problems that arise during the "DUE DILIGENCE" procedure.

One of the most common problems is the situation when the seller refuses to provide the requested documentation, does not assist in providing it, or refers the buyer to employees who do not know the answers to the questions. This speaks to the concerns that the seller has about providing information to consultants. Ultimately, this is a matter of misunderstanding between the seller and the buyer.

Throughout the process, the buyer should be aware of the stress that occurs when his staff interacts with the seller. The due diligence procedure violates the normal routine of business and may be regarded by the seller as unfounded suspicion on the part of the buyer. The seller may fear negative consequences for the business and its future sale to others if the proposed transaction does not go through. Some potential deals have fallen through due to strict due diligence procedures that have antagonized the parties.

Consultants recommend discussing the basic rules of due diligence during the negotiations between the buyer and seller in a letter or letter of intent. Such a letter indicates the time required to conduct due diligence, the possibility of copying documents, and the list of documents to which access must be organized.

It is very important to secure the seller’s commitment to assist in conducting due diligence and guarantee access to personnel, documents, and office premises. The seller is always wary of disseminating information and is concerned about maintaining confidentiality, so the most acceptable option is to conclude a separate confidentiality agreement.

Due diligence as a mandatory stage of the investment process.

Currently, market participants are becoming increasingly aware of the need to manage the risks of their activities, improve financial management, and formulate a balanced investment policy. The formation of new interrelations between companies, the need to modernize production, develop relations with investors and the opportunity to enter international capital markets have led to the fact that the requirement for transparency of activities today is no longer fashionable, but a mandatory requirement for both companies claiming leading positions in their markets and and for smaller emerging companies. The “Know your partner” principle is fundamental when choosing the form of business partnership and contractual terms for the implementation of a project or transaction.

A bank providing a loan to a client, an investor intending to purchase a business, a company concluding a trade contract - they all want to be sure of the reliability and profitability of the transaction. Such confidence can only be based on complete, reliable and objective information about the financial condition, legal status and market position of the counterparty company. To collect and analyze the necessary information, the interested party resorts to a special due diligence procedure, which in world practice is called due diligence.

Due diligence - (literally translated from English - ensuring due integrity) is a system or set of analytical and operational measures aimed at comprehensively verifying the legality and commercial attractiveness of a planned transaction, investment project, procedure, etc. in order to avoid or minimize existing business risks (legal, tax, political, marketing, etc.).

The concept of due diligence first appeared in US securities legislation in 1933. However, the term itself was not directly defined, since, as noted by state courts, it is impossible to establish a uniform scope of requirements for conducting due diligence of different companies. Modern due diligence standards were developed in Switzerland in the 1970s in order to avoid strict government regulation and control over the activities of banks. The Swiss Bank's Due Diligence Agreement, signed in 1977, established a unified approach to collecting information about clients when opening accounts and in the process of servicing them. Subsequently, the principles laid down by the Association of Swiss Banks became to be used by all participants in the investment process.

So, you will need due diligence if you or your company:

• want to sell your business or buy a ready-made one;
• intend to carry out a merger or acquisition of companies;
• intend to create a joint venture;
• are you going to contact banks or financial organizations for a loan;
• want to truthfully show a potential partner or investor your wealth and solidity;
• Do you want to check the reliability and solvency of your counterparty?

Most often, investors currently apply for due diligence in order to assess various risks associated with investing, usually when deciding whether to purchase a share in a business or a business project as a whole.

Conventionally, a due diligence study can be divided into several parts that differ from each other both in goals and in methods of implementation. However, all these elements are essential for a holistic and comprehensive study of the company’s activities and financial condition.

Typically, the Due Diligence procedure is carried out by three departments: financial analysts and appraisers; auditors; lawyers.

The work of financial analysts and appraisers involves:

• analysis of business financial performance, its prospects,
• assessment of the dynamics of financial performance indicators of business;
• valuation of property, rights and obligations sold as part of a business;
• assessment of the condition of fixed assets: their suitability for production, wear and tear, need for renewal, necessity of fixed assets for business (and prospects for selling unnecessary fixed assets),
• assessment of the financial scheme of the business, the range of legal entities whose performance results participate in the formation of the financial indicators of the business.

Auditors' task- conduct a financial audit of the enterprise’s activities, which includes:

• analysis of the Company’s revenue and cost structure for the analyzed period, analysis of the Company’s main performance indicators,
• assessment of the internal control system in terms of document flow related to the Company’s expenses, selective analysis of the quality and completeness of documents confirming the Company’s expenses,
• analysis of fixed assets: general composition, accrued depreciation, revaluation results,
• analysis of the Company’s financial investments,
• analysis accounts receivable,
• analysis of the Company's reserves: composition, value, dynamics, illiquid assets,
• accounts payable analysis,
• analysis of contingent liabilities (fines, penalties, guarantees issued to secure debts of third parties, endorsed bills of exchange, claims brought against the Company, pledges and other proprietary encumbrances Company property),
• analysis of the completeness and reliability of accounting for assets and liabilities reflected on the Company’s balance sheet,
• identification and synthesis of all significant tax risks, unaccounted for and (or) potential tax obligations available to the Company

Legal part of due diligence is a check:

• rights to property sold as part of a business, risks of challenging rights to property by third parties;
• rights and obligations included in the business, regarding their existence, validity, legality, risks of challenging transactions as a result of which rights and obligations arose;
• labor relations with the team working in the business (the existence and legality of employment contracts, agreements on financial liability, the legality of dismissing employees, the risks of unlawfully dismissed employees making property claims related to their dismissal, etc.);
• compliance with corporate legislation in all areas, the risk of claims by shareholders/participants of these legal entities related to non-compliance with the law when selling shares/interests, as well as when carrying out major transactions or interested party transactions with the property of these legal entities.

In the process of conducting Due Diligence, a project team, which includes appraisers, lawyers, and auditors, visits the company under investigation, collects information, and checks methods for preparing financial and other reporting. Using financial analysis and management survey techniques, current and projected trends in results, net assets and cash flows are analyzed. Thus, significant time is spent working directly at the enterprise under study, both to obtain information about the activities of the enterprise and to independently analyze the information.

It is extremely important that the company interested in conducting Due Diligence and the consultant (the company conducting the Due Diligence) have a common understanding regarding the goals and objectives of the audit. It is necessary to develop a clear, shared understanding of how the client assesses the value of the enterprise under study, how the enterprise fits into the client's strategy, and what information the assumption is based on. The consultant should also ascertain the seller's rationale for the sale and its profit interests after purchasing the business. The answers to these questions will help determine the scope of the work and, in particular, identify areas of critical importance to the client.

The results of the work are based on the received internal information, legislative and internal regulations, data provided by competitors and partners of the company being the object of study and are presented in the form of appropriate reports.

The peculiarities of business are such that significant risks affecting not only the final price of the transaction, but also its possible structure, can only be revealed during a thorough audit. Engaging a consulting company that is able to quickly focus on specific investment risks and comprehensively (with the involvement of financial and legal expertise) assess the target company is extremely important for the success of the investment. The damages incurred by a company that refuses due diligence may not be comparable to the costs of conducting due diligence.

Interested investors (both foreign and Russian) need to consider due diligence as a mandatory stage of the investment process, preceding a transaction to acquire shares or assets of companies. Due diligence will allow you to develop ways to manage risks (for example, carry out a reorganization preceding the transaction, refuse to purchase shares in favor of a transaction with assets, etc.). The objectivity and reliability of the information presented to his attention will allow the investor to make an independent and optimal decision.

Tags: Procedure, Due Diligence, Due Diligence.

Comprehensive support for entrepreneurs since 1993!

Law firm "AVENTA" offers you effective individual solutions for building and developing a stable, profitable business.

We have been providing corporate legal services for more than 20 years and have extensive experience in solving the most complex problems in any industry.

The services of the law firm "AVENTA" are a result, not a process!

Each business has individual characteristics, risks, problems and opportunities. We see our task as quickly studying and assessing the client’s problem, taking into account all the nuances and offering the optimal solution in each specific case.

PROFESSIONALLY

Leading experts in the field of legal consulting and judicial practice work with you. Thousands of companies that have effectively solved their business problems indicate that Aventa is rightfully one of the best law firms working with entrepreneurs.

PROMPTLY

Each lawyer specializes in a specific area of ​​law. That's why we quickly develop customized solutions even for the most difficult situations.

RELIABLE

We have extensive experience in successfully resolving corporate disputes, complex legal conflicts, crisis situations, and reducing possible risks to zero.

COMFORTABLE

Providing a range of legal services to enterprises and individual entrepreneurs will allow you to solve any business problems within the framework of working with one company: from creating a business to its reorganization or liquidation.

We are located in the center of the capital, so if you require the services of a law firm in Moscow, you can quickly come to us from almost anywhere in the city.

Remote legal advice by phone or online is also possible for residents of regions or clients who are on a business trip and cannot obtain the services of a law firm in Moscow.

SAFELY

The provision of legal services at Aventa requires complete confidentiality, maximum accuracy in assessing business risks and strict adherence to current legislation.

RATIONAL

The cost of legal services in Moscow can be a real stumbling block. But we assure you that neither the practice of “more expensive is better” nor the attempt to save money on resolving the issue is optimal. Moreover, often low prices for legal services in Moscow are more likely to indicate the presence of hidden additional fees or low qualifications of employees.

We do not strive to set the lowest prices for legal services in Moscow. However, we support a rational and transparent pricing policy.

• no hidden extras
• without imposing additional services
• without breaking the service into many “sub-items”
• without chaotic “cheating” due to the location in the center

Therefore, we can objectively say that we provide inexpensive legal services in Moscow (CAO), which pay for themselves many times over in the efficiency and efficiency of our work.

Law firm "AVENTA":

We offer:

• Legal support of the company

Full legal support of the financial and economic activities of the organization.

• Litigation, legal services

Protection of client interests in corporate conflicts, ranging from pre-trial resolution of disputes and filing a claim to representation of interests in arbitration courts, Intellectual Property Court.

• Due Diligence

Legal, financial and tax Due Diligence, which provides an objective assessment of the state of the business, identifying existing risks and ways to minimize them.

• Full range of services on patent and copyright issues

Reliable protection of companies' intellectual property, from registration of trademarks, patenting of inventions, utility models and industrial designs, to legal protection of intellectual property in court.

• Valuation of material and intangible assets companies

The full range of valuation services for business: business valuation, stock valuation, real estate valuation, equipment valuation, intellectual property valuation.

• Full range of services on corporate and shareholding law issues

Providing consulting legal services and practical legal assistance in registering legal entities, accreditation of foreign representative offices and branches. Drawing up and introducing amendments to constituent documents. Services for liquidation, bankruptcy and reorganization of legal entities, closure of representative offices and branches.

Unfortunately, we cannot provide an exact price list for services, since each case is individual. Contact us using an online application or by phone +7 495 134-12-21. Our experts will guide you on the preliminary cost and other issues.

We will be glad to see you among our clients!

Term Due Diligence(Due Diligence) is rarely given the attention it deserves in business publications. However, this concept is often used in business circles, sometimes without a precise understanding of its meaning. There are several interpretations of this term: “due diligence”, “careful observation”, “due diligence check”, “a comprehensive study of the reliability of the information provided”, “a comprehensive study of the company’s activities, its financial condition and market position”.

« Due Diligence", - due diligence - is most often used in the work of Western investment banks and denotes a set of actions designed to provide the project with minimal protection from surprises. It is clear that they are talking about assessing enterprises or other clients from the point of view of the interests of banks.

Similar principles have spread throughout the world, incl. in Russia, although the approach to customer verification has not yet been formalized by standards, it largely depends on the country where the bank operates, and remains internal matter the bank itself.

Purpose and stages of Due Diligence

Today, Due Diligence has ceased to be a practice unique to the banking sector. Now this procedure usually means conducting a comprehensive analysis of the enterprise’s activities from the point of view of financial analysts, auditors and lawyers, with subsequent preparation for the customer of a detailed report on the state of the enterprise.

With the development of the market, doing business becomes interesting, but also more risky. An attractive business purchase at first glance can actually lead to a negative effect. Having already purchased a company, you can lose part of your assets due to the fact that at one time they were incorrectly registered legally, you may encounter problems with tax obligations, etc. The most reliable way to minimize risks in large investment transactions today is the Due Diligence procedure. Business communities are constantly faced with the need to obtain real information about existing and future partners, their financial condition, creditworthiness, reliability and other problems.

The grounds for conducting Due Diligence may be::

• sale/purchase of a company;
• assessment of the company's investment attractiveness;
• public offering of securities on the stock market;
• mergers and acquisitions;
• creation of a joint venture;
• commercial lending;
• checking the reliability of your counterparty.

Duration of Due Diligence takes from several weeks to a year depending on the structure and size of the business.

Purpose of Due Diligence— avoid or minimize business risks associated with various circumstances:

• acquisition of an enterprise (part of it) at an inflated cost;
• failure to fulfill obligations by the debtor enterprise;
• loss of property, money;
• causing losses, incl. intangible assets;
• initiation of litigation and their adverse consequences;
• seizure of property or application of other interim measures;
• recognition of the transaction as invalid;
• foreclosure on property, securities;
• bringing to tax, administrative or criminal liability;
• emergence of corporate conflicts;
• loss of intellectual property;
• political and administrative risks;
• unfair actions of competitors;
• unsatisfactory execution of the project (business plan) due to ineffective business organization, etc.

Who can be a Due Diligence customer? Now it's not only commercial bank, but also the investor making the final decision on the possibility of investing, or the acquiring company assessing the risks of the transaction and the cost of the acquisition. The company itself can also order Due Diligence in anticipation of attracting investments.

Due Diligence is also gaining momentum in Russia, which is facilitated, first of all, by the entry of our enterprises into international capital markets, as well as the increasing demands of investors for the disclosure of information about the object of financing. According to experts, in the next 5-10 years the Due Diligence procedure will become as widespread in Russia as in developed Western countries.

Due Diligence Procedure

Specialists evaluate the benefits and liabilities of the proposed transaction by analyzing all aspects of the past, present and projected future of the acquired business and identify any possible risks.

The analysis is based on internal information, regulations, data provided by competitors and partners. During this work it is necessary:

• verify the accuracy of financial and other internal information;
• find confirmation of the estimates/assumptions contained in the business plan;
• assess the possibility of implementing the company’s short-term and long-term strategy;
• make sure that all documents are prepared correctly in terms of their compliance with the law and internal rules of the company;
• ensure the correctness and timeliness of filing tax and statistical reporting;
• assess the company's competitive position in the market in which it operates;
• identify the presence and volume of external and other debt;
• make sure that the company's management is competent enough to implement the plans.

The essence of the Due Diligence process is shown schematically in the figure.

Due Diligence is a comprehensive analysis of the entire set of relationships within a company and its interaction with the environment in which it operates. Conventionally, this study can be divided into several blocks, which differ from each other both in goals and in methods of implementation.. However, all these blocks are essential for a comprehensive study of the company’s activities and financial condition.

These are the blocks:

• Operational analysis (analysis of business organization), in which the main areas of study are: historical development of the company, organizational structure, management, personnel, sales, procurement, strengths and weaknesses, limiting factors;
• Financial analysis provides a conclusion about the ability of an enterprise to generate income;
• Analysis tax position business in order to assess the tax burden and the possibility of tax optimization;
• Legal expertise determines the company’s activities in accordance with current regulations in the field of civil, labor, corporate law;
• Analysis of the market situation in order to determine the company’s position in a competitive environment, the potential and prospects for market development, as well as assessing the company’s development opportunities in accordance with market dynamics;
• Checking the company's influence on environment— study of the impact that the enterprise’s activities can have or does have on the environment.

Of course, it is not necessary to carry out a full check. Taking into account the purpose of the inspection, its necessary and sufficient level is determined. The Due Diligence process is an extremely important stage in preparing for a transaction. The negative consequences that companies have to face in the absence of such a procedure are often much more significant than the resources spent on its implementation.

Operational Due Diligence

General operational or organizational and managerial Due Diligence - special study of the enterprise management system as a whole and/or its individual subsystems to assess the quality of management, the presence of risks, the efficiency of reserve production, and development potential. It includes checking the presence and quality of the following management systems: strategy, operations and production, quality, personnel, external relations, procurement, sales, as well as studying the quality of administration and security systems.

Let's take a closer look Due Diligence (or diagnostic) tasks for its individual blocks.

General information about the company

• history of creation and main stages of development;
• areas of activity, types of products/services produced;
• main goals of the company, ways to achieve them;
• positioning of the company in the market, development prospects;
• company specifics;
• key performance indicators of the company (volume, profitability, etc.).

Company strategy

• main strategic goals and indicators of the company;
• to what extent the company’s goals satisfy the SMART principle (specific, measurable, consistent with each other, achievable, time-bound);
• to what extent the adopted strategies correspond to the current level of the company (organizational structure, financial position, potential, etc.);
• what stakeholders and groups of people influence the development of strategy;
• main directions of the company's investment policy.

Company management structure

• how the company is managed;
• correspondence organizational structure set goals and current activities;
• correspondence between formal and actual organizational structures;
• ways to optimize the management structure in order to reduce management costs and reduce response time to control actions;
• which groups within the company have a significant influence on the operational management of the company, how the balance of interests can be maintained within the framework of the company’s general strategy.

Business processes

• composition of main business processes;
• how the main business processes in the company are carried out;
• how the company’s main business processes are regulated;
• compliance of business processes “as is” with existing regulations in the company;
• advantages and disadvantages of organizing business processes.

List of business processes that need to be analyzed during Due Diligence may vary depending on the purpose of the analysis. Typically, the following business processes are analyzed:

• marketing;
• sales;
• production;
• supply and inventory management;
• engineering and technical support;
• ensuring production and economic activities;
• financial and economic management, incl. planning, accounting, control and analysis of plan execution, financial flow management;
• investment activity management;
• quality management.

As a result of conducting operational Due Diligence, the company receives:

• conclusion of consultants on the compliance of the actual management practices of the company with the rules established in regulatory documentation (both external and internal);
• conclusion of consultants on the compliance of the actual management practices of the company with the best examples (for the industry, for similar scales of business);
• description of key business processes indicating their potential problem areas;
• recommendations and an enlarged action plan to improve company management.

It should be noted that from the point of view of a potential investor or lender, the presence of a feasible transformation plan is a positive argument when making a decision.