What due diligence means in practice
In practice, due diligence means that buyers or investors review the company's finances, contracts, structure and risks. The review is often carried out with the help of advisers and follows a clear checklist.
The results are used to adjust the valuation or terms, or in some cases to call off the deal if the risks are judged to be too great.
Areas normally included in due diligence
A due diligence process usually covers several areas of review.
- Financial review of the income statement and balance sheet
- Legal review of contracts and company structure
- Tax analysis and history
- Commercial assessment of the market and business model
- Review of risks and commitments
When these areas are analysed together, the investor gets a clearer picture of the company's strengths and weaknesses.
When due diligence is necessary
Worth bearing in mind
Due diligence becomes necessary when significant capital, ownership or control is at stake. The process is often carried out ahead of company acquisitions, investments in unlisted companies or when new owners are joining the company.
In these situations, general information is not enough. A deeper review is needed to understand the company's actual position, both financially and legally.
Frequently asked questions
Is due diligence mandatory for investments?
No, but it is strongly recommended for larger deals and investments.
Who is responsible for the due diligence process?
Usually the buyer or investor, often with the support of external advisers.
How long does due diligence take?
It varies depending on the scope of the deal, but it can take anything from a few weeks to several months.
Can due diligence affect the price of the company?
Yes, identified risks or shortcomings can lead to an adjusted valuation or adjusted terms.
Is due diligence more common in unlisted companies?
Yes, because the level of information is often lower than in listed companies.