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Types of due diligence

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This page has been archived because it is no longer current information but is still relevant, or it is current but over 12 months old
  • Publish date: 03 November 2014
  • Archived on: 03 November 2015

While due diligence may not be a topic that sets the heart racing, being able to understand and evaluate a prospective acquisition, buyer or partner is essential to any growing company in today's challenging business environment.

If you're hoping to sell your business, are considering a merger or if you're entering a contract with a new supplier, doing your homework will give you the knowledge and confidence to get what you want from the deal. It shouldn’t just be a rubber-stamping exercise.

Due diligence identifies issues so they can be tackled early on; it can help you establish the true value or cost of a business transaction and the right information can contribute to how the terms of your agreement are drafted. Due diligence should empower you to negotiate the best terms for your firm.

Ultimately, due diligence shouldn't just be focused on compliance – it's about having confidence in who you do business with and a better understanding of their business.

Types of due diligence

The three main categories of due diligence are legal, financial and commercial. Although these have traditionally been distinct, the best due diligence programmes maintain an element of close cooperation as the work in one area can often inform the checks being carried out elsewhere. Many practices now offer an integrated service that brings these strands together.

Legal

Legal due diligence seeks to examine the legal basis of a transaction, for example to ensure that a target business holds or can exercise the intellectual property rights that are crucial to the future success of the company.

Other areas that would most likely be explored include:

  • legal structure
  • contracts
  • loans
  • property
  • employment
  • pending litigation.

Financial

Financial due diligence focuses on verifying the financial information provided and to assess the underlying performance of the business.

This would be expected to consider areas such as:

  • earnings
  • assets
  • liabilities
  • cash flow
  • debt
  • management

Commercial

Commercial due diligence considers the market in which a business sits, for example involving conversations with customers, an assessment of competitors and a fuller analysis of the assumptions that lie behind the business plan. All of this is intended to determine whether the business plan stands up to the realities of the market.

Other

Other types of due diligence cover areas such as taxation, pensions, IT systems and intellectual property.

Latest developments

Over the last few years Corporate Financier magazine (available to ICAEW Corporate Finance Faculty subscribers) has covered the latest developments in the world of due diligence, particularly highlighting changes in the wake of the Lehman Brothers collapse. The six page feature article ‘Strategy: a new dimension’ in the July/August 2013 edition looks at the refocusing of due diligence, with operational and commercial due diligence now coming to the fore.

Planning a due diligence programme

No transaction is identical, so the specific elements that you include in the due diligence process will need to be tailored carefully. The collection of the ICAEW Library & Information Service contains a range of practical guides and checklists that can help you shape a due diligence exercise to fit your needs.

Help with information gathering

There are many ways that the services on offer from the ICAEW Library & Information Service can help you undertake your due diligence checks, providing information to support legal, commercial and financial due diligence.

Most services are supplied free of charge to ICAEW members and ACA students, but charges may apply to some services provided by commercial suppliers (where indicated below).

Business news

Market data

  • Find information on industry sectors through our series of Business & Industry Guides, including online access to market research.
  • Information on economic forecasts for specific countries can be obtained through our country profiles.

Company financials

  • UK and Irish company reports from the FAME database are available free of charge, providing financial data for 10 years. The reports also include details of company status, county court judgments, mortgage data and details of recent filings. Request a search on a company.
  • Original company documents for the UK and Ireland are available from the library enquiry team free of charge. Please contact the enquiry team direct to make your request.

Company directors

  • Connections reports from EQUIFAX can help you to uncover deliberate attempts to hide company and director linkages, as well as identifying directors with a track record of company failure. Request a search on the current directors of a company (a charge applies for this service).
  • Director reports provide a full list of current and past directorships. Reports are produced using the FAME database and are free of charge. Request a report on a director

If you would like assistance finding the material you need, please contact the Library enquiry team by email at library@icaew.com, by phone on +44 (0)20 7920 8620 or by fax on +44 (0)20 7920 8621.

The information contained in this article is for general guidance only and does not constitute advice. You should always seek professional advice for your personal circumstances. Please read the full disclaimer.

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