Businesses around the world are increasingly making all kinds of deals, including M&As, JVs, and private offerings. Therefore, the role of due diligence (or DD for shortness’ sake) in researching, evaluating and completing those incredibly challenging transactions is hard to overestimate. And given the hitherto unheard of challenges and threats entrepreneurs are facing these days, exercising due diligence is taking on ever greater significance.
What makes the 21st century unique in terms of conducting business is the number of international transactions taking place on a daily basis.
Today, even small-sized and middle-sized companies can hardly avoid being involved in international transactions of this or that kind.
With modern technology constantly evolving and capital seeking to move overseas, cross-border deals have long ceased to be the exclusive domain of large transnational corporations.
Concluding an unsuccessful deal can be attributed to a number of factors, of which the most important one is, undoubtedly, lack of proper DD.
Exercising good due diligence can prevent businesses from undertaking deals that are doomed to failure, or identify threats in seemingly innocent transactions. And that, in turn, can help them offset or eliminate the risks prior to or immediately after closing the deal.
Whether going through hard times or experiencing booming growth, businesses need to be constantly reminded of one simple maxim - DD is the cornerstone of their success (and vice versa).
Performing due diligence is tremendously important, especially nowadays when high-tech companies are becoming increasingly involved in all kinds of transactions, including international ones.
We are living in the era of post-industrialism which makes evaluating and using intellectual property of companies a far greater challenge than it was in the industrial era.
Exercising comprehensive due diligence requires investors to put the company they are going to invest in (e.g. a JV or acquisition candidate) under close scrutiny. Putting it differently, they need to make sure that the business entity they intend to put their money in is exactly what they think it is.
Undertaking transactional DD is inseparably linked to the strategy an investor is going to pursue. The ultimate goal of their DD should be to ensure that the deal they intend to conclude is in line with their strategy, both financially and legally.
DD requires them to investigate all aspects of the potential candidate’s operation, including authorization to engage in their line of business, liabilities, financial statements, and subsidiaries. If the company an investor is going to invest in is in an identical industry, they need to ensure that their businesses will be financially, operationally and managerially synergetic.
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DD is not the sole prerogative of investors, which means that they can become a DD target as well. That is particularly true of the cases when investors can offer both monetary and non-monetary incentives. Even when it comes to cash-only deals (especially M&As or JVs), investors can end up becoming an object of careful scrutiny.
The company they are going to acquire or merge with may want to know how exactly it is going to benefit from the merger and whether its corporate culture can be seamlessly integrated into that of the newly formed entity. Failure to do so my result in all kinds of adverse consequences, including interpersonal conflicts and management-related disagreements.
Depending on a geographical location, DD can take different forms. Technically, it can be divided into two categories, namely an Anglo-Saxon and non-Western one. The first category implies an in-depth analysis of all legal and financial aspects of the deal prior to its conclusion. A contract is then made in writing which painstakingly describes each and every
right and obligation the parties have.
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The second category centers around building trust between the parties prior to signing a provisional agreement. Once a provisional agreement is signed, the parties can proceed to perform in-depth due diligence that is followed by the conclusion of a final agreement.
For instance, a UK-based company intending to conclude a deal with a business entity based in a country where the first category of DD is not practiced will have to retrieve the detailed documentary information on it by resorting to the means it is not accustomed to.
Therefore, companies engaged in cross-border activities need to be mindful of the said discrepancies and draw a clear distinction between conducting business domestically and internationally.
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