Due diligence refers to the careful examination and evaluation of facts and information in order to make informed decisions and minimise risks. Originally anchored in the financial and economic sector, due diligence is now relevant in many areas, from corporate governance, environmental protection and occupational health and safety to compliance with human rights in supply chains and somut within the framework of the new Supply Chain Act.
The term ‘due diligence’ is derived from Anglo-American commercial law and literally means ‘due care’. In practice, due diligence is primarily applied to company takeovers, mergers and important business decisions in order to identify and safeguard against all relevant risks.
THE DIFFERENT AREAS OF DUE DILIGENCE
FINANCIAL DUE DILIGENCE
This involves reviewing the financial situation of a company, particularly with regard to balance sheets, income and liabilities. The aim is to obtain a realistic picture of the net assets, financial position and results of operations.
LEGAL DUE DILIGENCE
This area examines whether the company is acting in accordance with the law and complying with all legal requirements. It also examines whether there are any potential legal risks or outstanding legal disputes.
TAX DUE DILIGENCE (TAX DUE DILIGENCE)
Tax liabilities and structures are analysed to ensure that there are no tax risks or uncovered obligations.
OPERATIONAL DUE DILIGENCE
The focus here is on operational business activities and the question of whether the company is operating efficiently and sustainably. This also includes analysing management structures, supply chains and production processes.
ENVIRONMENTAL AND SOCIAL DUE DILIGENCE
This area is becoming increasingly important as part of ESG initiatives (Environment, Social, Governance). This involves checking whether the company acts responsibly with regard to the environment and labour conditions in the supply chains.
THE DUE DILIGENCE PROCESS
A typical due diligence process is divided into several phases:
- Preparation and planning: in the first phase, the scope of the due diligence is determined. This involves determining what information needs to be collected and analysed and who in the team is responsible for carrying it out.
- Data collection and analysis: In this phase, the required information is collected. This includes financial and legal documents as well as data on company structures and operating procedures. A so-called ‘data room’ is often set up in which all relevant information is accessible to the auditors.
- Assessment and risk analysis: Once all the data is available, the experts analyse the risks and draw up a list of potential challenges and obstacles.
- Reporting: The results of the due diligence are recorded in a report that provides the decision-maker with detailed information and recommendations. The report serves as a basis for negotiations and decisions.
- Integration and monitoring: Once an acquisition or merger has been completed, an integration phase can follow in which the due diligence results are further utilised to seamlessly integrate the business into the existing structure and ensure ongoing monitoring.
IMPORTANCE, BENEFITS AND ADVANTAGES OF DUE DILIGENCE
Due diligence protects companies and investors from wrong decisions that can lead to financial losses and legal problems. Thorough due diligence plays a crucial role, particularly in the case of major investments such as takeovers and mergers, but also in the context of joint ventures and partnerships. By identifying risks at an early stage, companies can enter into negotiations better prepared, minimise liability and ensure the long-term stability and profitability of the investment.
In addition, due diligence is a key tool to ensure compliance with ethical and legal standards. In an age of growing global responsibility, it is increasingly important for companies to prove that they are not only financially sustainable, but also ethically sustainable. Practising due diligence is therefore also an important marketing factor today in areas where customers attach great importance to social responsibility.
CHALLENGES AND LIMITS OF DUE DILIGENCE
Although due diligence is recognised as an effective risk management tool, it is not without its challenges.
- Access to and quality of information: A major obstacle to due diligence is access to complete and reliable information. The quality of information can be limited, especially in international transactions, which makes risk assessment more difficult. Language barriers and different business cultures make the exchange of information difficult and prone to error.
- Time and cost: Conducting thorough due diligence is often time-consuming and costly. This is a particular challenge for small and medium-sized companies. Here, it is particularly important to plan correctly and scale appropriately so as not to overburden the company.
- Unforeseeable risks: Despite careful scrutiny, not all risks can be identified in advance. For example, market conditions or regulatory requirements can change unexpectedly and have a negative impact on a company's economic situation.
PEROBA QUALITY MANAGEMENT FROM MUNICH - PLANNING AND IMPLEMENTING DUE DILIGENCE IN A TARGETED AND EFFICIENT MANNER
Consulting, implementation, audits and QM tools from a single source
Due diligence is an essential tool in modern business life that helps both companies and investors to make informed decisions and minimise risks. Especially in times of growing responsibility and sustainability, due diligence in the environmental and social areas is becoming increasingly important. In the globalised world economy, due diligence is becoming an obligation for every company that wants to operate successfully and responsibly in the long term.
PeRoBa GmbH Munich is a service provider with many years of experience for quality management especially in automotive and
mechanical engineering. We help with all important standards (VDA6.3, IATF 16949,...) on the way to certification or
re-certification. We also work closely with universities and research institutes. Managing Director Dr. Scherb teaches
as a lecturer, for example, at the Hamburger Fern-Hochschule, the FOM in Munich and is also a speaker at the TÜV-Süd Akademie,
the Bildungswerk der Bayerischen Wirtschaft and many other institutions.
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Quality management ISO 9001, VDA 6.3 and IATF 16949 - www.peroba.org