Due diligence provides the aid that investors and companies need to understand the nature of a deal, that is, to inform them more regarding any possible risks and if the deal fits with their portfolio. In short, the entire process of due diligence is much like doing homework for a potential future transaction, which is essential to ensure any investment decision goes smoothly.
The Black’s Law Dictionary defined due diligence as such: “Such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case.”
In the context of mergers and acquisitions, due diligence is equivalent to a form of legal, operational, and financial review; to verify the claims and accuracy of the information provided by the involved parties.
In a simpler explanation, due diligence is an exercise of reasonable care in the course of business. The entire process involves careful investigation of the aspect of economic, legal, fiscal, and financial circumstances of an ongoing business or an individual. The covered aspects involve thoroughly examining sales figures, shareholder structure, and any possible links with economic crime, such as corruption or tax evasion. This form of appraisal is necessary for any company that initiates a new form of relationship with its partners and/or with the agenda of purchasing another company or property for investments.
The due diligence process is usually carried out by equity research firms, fund managers, individual investors, risk and compliance analysts, and broker-dealers. This process, however, does not mean due diligence is only allowed to be done by them, as individual investors are allowed as much freedom to perform their due diligence. Conversely, by default, broker-dealers are required by law to undertake due diligence on security before selling it.
Legal due diligence is a thorough examination carried out by a legal consultant on a company or object to obtain material information or facts to find a description of the condition of a company or object of a transaction. To put it in simpler terms, legal due diligence is an activity to assess legal risks that may arise during an ongoing business. The risks in question are those related to the transaction that will be processed. Thus the “activity” (the process of due diligence) is to identify risks that are usually unnoticed. A properly conducted due diligence allows for better decisions, a chance of more opportunities, and better situation management.
Several factors will be investigated/cross-checked during legal due diligence, which includes but are not limited to:
All findings from the examination process are conveyed in a due diligence report, which reviews legal risks based on laws and regulations. Not only that, but the due diligence report also provides recommendations on what steps should be taken regarding these legal risks.
Some principles must be fulfilled by legal experts when it comes to performing the process of legal due diligence, such as the followings:
To elaborate, legal due diligence is essential because it helps you to:
While it may seem to only benefit one party, in truth, due diligence benefits each involved party. From one perspective, due diligence provides peace of mind that they’re making the right deal and have received all the necessary information to make a good decision. This information will either assist in validating good assumptions or alerts them about potential risks.
Conversely, the process of due diligence also assists business owners in taking a deeper look into the financial integrity of their business. Along the way, it also assists them in finding out the market value of their business. Because valuations and acquisition prices are only able to get higher for many sectors, it’s proven necessary for companies to invest in quality due diligence reporting and services.
It’s natural for any company who wants to perform legal due diligence to follow the custom of the country’s regulations, which may differ between one country with another. Specifically in Indonesia, the outlines are as follows:
Our experienced team is well-versed in performing due diligence to assist you in achieving your business goals. With years of experience, we go above and beyond to ensure that all necessary steps are properly conducted so that the result of the process of due diligence proves satisfactory. We are ready to go above and beyond to assist your future endeavors in business.
Not specifically, but to those unfamiliar, it might seem to be the same.
While it might seem similar to an audit, due diligence differs specifically by focusing on the asserted information given to one party by the other. Most of this information has been formed from financial statements, so due diligence makes it possible to assess benefits, liabilities, risks, and opportunities based on those documents.
Generally speaking, what may be included within the process of due diligence vary and differ from one business to another and from one company to another. The reason is that what’s required depends on what the company wants and needs; not only the company but also the bank, broker, investor, lawyer, and others may need.
Examples of the needed items are:
Due diligence is easily recognized as the most time-consuming and especially tiring part of a company review process, no matter how one acknowledges it as essential. Due to it taking a lot of energy to be performed, misconceptions tend to happen here and there, including:
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