The process of “Due Diligence” in the sale of companies

From the moment potential investors or buyers show interest in the acquisition of a company, until said acquisition is definitively carried out, an interesting information process begins in order to obtain a correct knowledge of the company that is intended to be acquired.

This is where the figure of Due Diligence comes in, the name by which the detailed investigation of the different business areas of a company is known.

Due Diligence is still a relatively unknown figure in our legal system, despite being a very widespread figure in the business scene in recent years.

The objective of Due Diligence is to reduce the risk of the transaction, since it provides the buyer with an independent and detailed evaluation of the company, being able to review the possible hidden liabilities or the possible contingencies found in each of the study areas. This is postulated as one of the fundamental pillars on which the final decision of the acquisition of the company is based, also derived from it, and in case of making the purchase, the conditions that will govern it are established, that is that is, the conditions of the contract.

This greater knowledge of the investigated company entails the identification of the possible risks of the operation, as well as the opportunities, in addition to identifying, as mentioned above, the possible liabilities and contingencies that could imply a variation when determining the value of the company that is intended to be acquired.

Therefore, Due Diligence increases the knowledge that the buyer has about the company, which means that he cannot claim ignorance about possible contingencies that may arise in the future

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Once we have defined what a Due Diligence consists of and what it is for, we are going to focus on describing when it takes place, what it comprises, what it costs and how it ends.

When does Due Diligence take place in a business sale

Due Diligence would begin, after the period of contact and negotiation between sellers and buyers, when the latter show real interest in buying the company Reflected in the “letter of intent”, this letter establishes the intention of the buyers to acquire the company in its entirety or a part of it if certain conditions are met.

The letter of intent contains:

• The guidelines that will be followed in the operation.
• The obligation of the seller to provide access to all the information necessary to carry out the purchase of the company, setting the determined period of time.
• The buyer’s commitment to keep confidentiality of all the information it receives as a result of the transaction, as well as the negotiation itself.
• The seller’s commitment not to sell the company to a third party during the process.

Areas covered by a Due Diligence

Based on the fact that Due Diligence depends on various factors, such as the type of transaction to be carried out or the characteristics of the buying or selling party, as well as the complexity of the business itself, the most common areas to perform Due Diligence are:

• Financial area: which allows us to know the economic health of the company. Their numbers and growth forecasts are analyzed. Its role in assessing whether the company is viable, its liquidity, as well as the degree of indebtedness it has and even its financial history.
• Legal area: allowing to verify the legal situation of the company, the contractual relations that unite it with third parties, the identification of possible legal proceedings that may affect the business, as well as its corporate situation. In this area, the rights that the company has in matters of industrial and/or intellectual property are also verified.
• Labor area: deals with studying that the company complies with all the regulations regarding the labor relations of its workers. Verifies that the remuneration systems are applied correctly, taking into account the seniority of the staff. In addition, they verify that legal requirements are being met with the Social Security.
• Tax area: reviewing possible contingencies and ensuring that the company is up to date with its obligations to the Treasury.

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Although these areas are the main ones to review when performing a Due Diligence, we can find others that are equally important for the buying party to get an idea of the reputation of the company, such as its market position and its commercial aspects, carrying out a detailed review of its structure and operation, as well as the business processes or the market where the company operates, having a clear idea of both the ABC of suppliers and customers.< /p>

It is also reviewed that the company complies with environmental issues, data protection, compliance and computer security systems and information technology.

Due Diligence Report

The Due Diligence process ends with a report, which includes all the review areas agreed with the buying party and on which the study has been carried out. The aforementioned report must also include the opinion of the advisors on the convenience of carrying out the transaction, it must also mention the additional guarantees that must be requested, as well as the possible solutions to minimize the contingencies that have appeared during the process.

In conclusion, Due Diligence processes allow in-depth knowledge of the risks of the analyzed company, being a fundamental tool in negotiation when it comes to establish and agree on the purchase price, since it allows knowing all the strengths and risks of the operation.

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