3 Best Due Diligence tools according to Investopedia

Today Due Diligence is a kind of comprehensive analysis that summarizes the relationship between the factors of the internal and external environment of the enterprise.

Due Diligence – an effective method for business evaluation

Due Diligence is a procedure for forming an objective view of the investee, which includes investment risks, independent assessment of the investee, and many other factors. First of all, Due Diligence is aimed at comprehensive verification of the legality and commercial attractiveness of the planned operation or investment project, but also plays an important role and completeness of the information provided in this type of inspection, which allows investors or business partners to better assess.

Due Diligence is a component of business research, economic development that helps to establish open relations in connection with the conclusion and implementation of economic, legal, and other agreements between contractors. In practice, Due Diligence is usually performed when buying a business or part of it or purchasing significant objects (real estate, resources, etc.).

Specific classifications of Due Diligence are based on the nature of the action and the outcome of certain procedures. In this regard, there are financial, legal, tax, commercial, marketing, environmental, political Due Diligence, and other types.In contrast to the audit, it covers more areas of the company’s activity and can be aimed at in-depth research of certain financial issues.

Especially important due diligence is during M&A deals. The success of M&A transactions largely depends on correctly determining the value of the company and obtaining a synergistic effect after the merger.In particular, when conducting M&A, a careful assessment of the potential risks of the proposed agreement should be made by examining all significant aspects of the past, present, as well as the projected future of the proposed investment object.

The systemic and risk-oriented approaches are taken as fundamental for Due Diligence. The key tools for conducting this operation are a list of risks and a risk matrix.

Basic tools for Due Diligence realization

In modern conditions of development of automation information technologies of audit acquires special value. The use of virtual technology does not change the purpose of the audit procedures, but significantly affects the methods of these procedures, and hence the audit methodology. In this case, Virtual Data Room is a win-win solution as it provides a secure repository for data exchange. 

Stages of organization of the Due Diligence process in the Data Room include:

  • Primary screening. Evaluation of the business plan, meeting with management, checking additional documentation on performer`s investment project, consultations with venture investors and professional advisers. 
  • Business case analysis. Confirmation that the analyzed business meets the requirements for successful implementation of the investment project.
  • In-depth analysis. Financial confirmation ability to implement an investment project.Determining the risks of loss of value by the company and development of measures for its management.

Data Room Due Diligence is based on the analysis of inside information, regulatory documents, and data received from contractors.The procedure is usually carried out on behalf of a buy-side. If the Due Diligence check is performed at the request of the sell side m&a process, the motivation changes.

In the process of the audit, it is necessary to choose a check that will consist of several parts, namely:

  • Collection of primary information on the market assessment segment and its development trends;
  • Assessment of profiles of key competitors and trends in technology;
  • Assessment of management skills and capabilities of the company;
  • Analysis of the company’s business plan.