No bears on the road?

A due diligence investigation is a thorough investigation conducted before a business transaction takes place. The purpose of this investigation is to gain an in-depth understanding of the financial, legal, operational and strategic aspects of the business to be acquired. It helps to make informed decisions and identify any risks or issues before the transaction is completed.

Background on due diligence

Due diligence can be seen as a check before a proposed decision is finally made. In that sense, you can compare it to, say, an architectural inspection before a property is actually purchased. Here too, the parties come to a transaction price, but make a reservation that there are no defects that could be revealed by an architectural inspection.

The ultimate goal of due diligence is to get a complete picture of the company and any issues that may affect the transaction. Based on the findings, the buyer or investor can decide whether to go ahead with the transaction, revise the terms, or even abandon the transaction if serious issues come to light.

When is due diligence necessary?

A due diligence is usually part of an equity transaction. For example, in the acquisition of a company or the entry of a new investor. But a due diligence can also be part of another important business decision, such as formalizing a strategic partnership or initiating a restructuring. The buyer, financier or investor wants to make sure that all the information is correct. A reference point for this can be, for example, the information memorandum used during the sales process. Typical questions that come up are:

• Did staff members resign during the sales process?
• Are sales in line with the forecast?
• Are strategic customers satisfied with services?

In addition to checking consistency with previously provided information, additional information that may shed new light on risks, for example, is considered.

Difference from the IM

Both the information memorandum (IM) and the due diligence process provide relevant background information. An IM is a document prepared by a selling party to provide potential buyers or investors with detailed information about the company and its investment opportunity. The IM typically contains information about the company’s operations, financial performance, market conditions, competitive position, strategies and other relevant aspects.

The purpose of an IM is to inform interested parties of the business opportunity and help them decide whether they have further interest in pursuing a transaction. Thus, it is prepared in advance. Due diligence takes place later in the transaction process, namely after interest has been expressed and parties are working on a concrete agreement. The IM can sometimes serve as a starting point for the beginning of a due diligence process, where potential buyers dive deeper into the details.

Briefly, an information memorandum is a document that provides information to potential investors or buyers, while due diligence is a process of in-depth research and analysis that takes place when a buyer is interested in reaching a deal. The process will give the buyer a more thorough understanding of the company or transaction before final decisions are made.

Next step

To make these final decisions with certainty, it is important to go through the due diligence process. We discuss the different aspects of this process and what discussion points you can expect as a result in our white paper “This is how due diligence works.” You can download it here.