Due Diligence

What is meant by Due Diligence?

The meaning of Due Diligence, which can be translated as "due diligence," derives from a concept in American private and commercial law. It essentially refers to the investigative activity concerning the situation of a company, carried out on behalf of buyers before, during, and after the acquisition of real estate, companies, securities, or stocks.

So, what does Due Diligence mean? It is a form of risk assessment that serves to clarify to the buyer what the risks and benefits associated with the transaction are.

What are the types of Due Diligence?

The types of due diligence vary depending on the different areas of evaluation necessary for a specific operation. Here are the main examples of due diligence.

• Financial Due Diligence: analysis of the company's financial statements, including balance sheets, income statements, cash flows, debts, credits, and other financial information. The objective is to assess the financial health and profitability of the company.

• Legal Due Diligence: review of contracts, agreements, ongoing lawsuits, intellectual property rights, and regulatory compliance. It serves to identify any legal issues or risks associated with the operation.

• Operational Due Diligence: assessment of daily operations, including production, logistics, human resource management, and the efficiency of business processes. It aims to identify areas for improvement and potential inefficiencies.

• Tax Due Diligence: analysis of the company's tax situation, including tax returns, compliance with tax regulations, and potential tax risks. The objective is to ensure there are no post-acquisition tax surprises.

• Commercial Due Diligence: evaluation of the market, customers, competitors, sales, and marketing strategies of the company. It serves to understand the market position and growth prospects of the company.

• Environmental Due Diligence: examination of environmental issues, including risks and liabilities related to sustainability and the environmental impact of business operations. It aims to ensure compliance with environmental regulations and identify potential environmental liabilities.

• Technological Due Diligence: evaluation of the company's technological infrastructure, including IT systems, data security, software licenses, and technological innovation. The objective is to ensure that the technology is adequate and secure.

• Human Resources Due Diligence: review of human resource management practices, including employment contracts, company policies, benefits, and compliance with labor regulations. It serves to assess employee morale and staff stability.

• Compliance Due Diligence: analysis of the company's compliance with all relevant regulations and standards, including those related to safety, health, and sector-specific regulations.

• Risk Management Due Diligence: assessment of the overall risks associated with the operation, including financial, operational, legal, and market risks.

• Web Diligence: examination of the company's online presence, including the website, social media activities, online reviews, and digital reputation. The objective is to assess the company's visibility, reputation, and online security. It includes the following aspects.

  • Website analysis: security, performance, SEO (search engine optimization).
  • Review of social media activities: strategies, engagement, reputation.
  • Online reputation assessment: reviews, customer feedback, press articles.
  • Verification of compliance with privacy regulations and data regulations, such as GDPR (General Data Protection Regulation).

Reputational Due Diligence

Reputational Due Diligence is a highly demanded activity nowadays: corporate reputation has become one of the fundamental assets for a company and is equivalent to the expectation that stakeholders have regarding the company's future decisions based on past decisions. Therefore, Reputational Due Diligence is necessary to protect against reputational risk: in supplier analysis, in acquiring a new partner, in starting a partnership with a company, or in appointing a prominent figure.

Phersei positions itself as a reference in the field of Reputation Due Diligence and reputational investigations.

Who conducts Due Diligence?

Due diligence can be conducted by various professionals, depending on the nature and complexity of the operation. Here are some of the main categories of professionals involved.

1. Financial consultants and auditors: professionals specialized in financial and accounting analysis. They can be internal to the company or external, often coming from auditing and consulting firms (such as the Big Four: Deloitte, PwC, EY, and KPMG).

2. Lawyers and law firms: lawyers conduct legal due diligence, examining contracts, lawsuits, intellectual property rights, regulatory compliance, and other legal aspects of the operation.

3. Tax consultants: experts in tax matters, who analyze the company's tax situation and assess tax risks. They can work for accounting firms or tax consulting companies.

4. Operational consultants: specialists in business operations analysis, who evaluate production, logistics, human resource management, and other operational aspects.

5. Management and strategy consultants: professionals who analyze the market, customers, competitors, and marketing strategies. They may come from strategic consulting firms.

6. Environmental experts: professionals specialized in environmental issues, who evaluate the environmental impact and regulatory compliance of the company in terms of sustainability.

7. Investment banks: often involved in mergers and acquisitions, investment banks can coordinate and manage the entire due diligence process, using a team of internal and external experts.

8. IT consultants: in cases involving complex IT systems, IT consultants can be called upon to evaluate the technological infrastructure, data security, and other technological aspects.

9. Risk management specialists: professionals who assess the overall risks associated with the operation, including financial, operational, legal, and market risks.

How long does Due Diligence take?

The duration of due diligence can vary significantly depending on various factors, including the complexity of the operation, the size of the company involved, the quality of available information, and the cooperation of the parties. However, some general guidelines can be provided on the typical duration of due diligence.

1. Size and complexity of the company

   • Small and medium-sized enterprises (SMEs): due diligence can last from a few weeks to one or two months.
   • Large enterprises: for larger and more complex companies, due diligence can take from two to four months or more.

2. Type of operation

   • Simple acquisitions: in the case of acquisitions of small companies or less complex operations, due diligence can last from two to four weeks.
   • Complex mergers or acquisitions: in the case of more complex operations, such as mergers between large companies or cross-border acquisitions, due diligence can take several months.

3. Quality and availability of information: the duration of due diligence also depends on the quality and availability of information provided by the company under evaluation. If financial, legal, and operational data are well-organized and readily available, the process can be faster. Otherwise, it may take longer to gather and verify all necessary information.

4. Response and cooperation of the parties involved: the speed at which the parties involved (seller, buyer, consultants) respond to information requests and cooperate can affect the duration of due diligence. Good communication and efficient cooperation can speed up the process.

5. Sector of activity: some sectors may require more detailed and specific checks, such as the healthcare, technology, or financial sector, where regulatory compliance and data security are particularly important.

In general, due diligence is a flexible and dynamic process that must adapt to the specific needs and circumstances of the ongoing operation. The parties involved often establish a preliminary timeline, but it is common for the process to be extended if issues arise or if further detailed analyses are required.

When is Due Diligence mandatory?

Due diligence is not always legally mandatory, but it is considered a standard and highly recommended practice in many situations to protect the interests of the parties involved and to make informed decisions.

However, there are specific contexts in which due diligence is practically mandatory to reduce risks and ensure legal compliance. Here are some of the main scenarios in which due diligence is strongly advised or essentially mandatory:

1. Mergers and Acquisitions (M&A): when a company is about to acquire or merge with another company, due diligence is essential to assess the financial, legal, operational, and commercial health of the target. This helps identify any hidden liabilities, risks, and opportunities.

2. Private equity and venture capital investments: investors conduct due diligence to assess the potential return on investment, risk management, and to verify the information provided by the founders and managers of the target company.

3. Real estate transactions: in real estate operations, due diligence includes verifying ownership, the legal and physical condition of the property, and compliance with local regulations.

4. Bond issuance or Initial Public Offerings (IPOs): companies intending to issue bonds or launch an IPO must conduct thorough due diligence to ensure that all information provided to investors is accurate and complete.

5. Acquisition of specific assets: when a company intends to purchase significant tangible or intangible assets (e.g., patents, trademarks, industrial plants), due diligence is essential to assess the value and legal compliance of such assets.

6. Partnerships and joint ventures: before entering into a partnership or joint venture, the parties involved conduct due diligence to ensure that the partners are reliable and that the agreement is beneficial for both parties.

7. Bank financing and other loans: financial institutions conduct due diligence to assess the debtor's repayment capacity and to minimize credit risk.

8. Regulatory compliance: In highly regulated sectors, such as financial, healthcare, or energy, due diligence is necessary to ensure compliance with regulations and to avoid legal penalties.

9. Public purchases and contracts: when a public entity or a state-owned company makes an acquisition or awards a contract, it is often mandatory to conduct due diligence to ensure transparency and fairness in the process.

10. Compliance with anti-money laundering (AML) and anti-terrorism regulations: Companies, especially those operating in the financial sector, must conduct due diligence to comply with anti-money laundering regulations and to prevent terrorist financing.

Even if not always legally mandatory, due diligence is considered a fundamental best practice to protect investments, avoid unexpected surprises, and ensure the success of commercial operations.

Investigative Due Diligence

Investigative due diligence represents a fundamental pillar to ensure safety and transparency in every commercial transaction.

As an investigative agency, we are committed to providing an in-depth analysis of the reputation, integrity, and potential risks associated with the people or entities involved.

We use a combination of public and private sources, interviews, and data analysis to uncover criminal records, legal involvements, conflicts of interest, and political connections. Our expertise allows us to offer a complete and detailed picture, essential in high-risk contexts such as international mergers and acquisitions, strategic partnerships, and significant investments.

By entrusting us, you will have the certainty of making informed and secure decisions, protecting your company from legal and reputational risks. Your safety is our priority.