As we’ve discussed in previous videos, conducting due diligence is essential in the purchase and sale of a company and involves analysing and auditing different types of company documentation before investing. Due diligence helps us understand the company’s true situation and determine whether the transaction is secure.
However, before defining the scope of the due diligence analysis, it’s essential to know what the most common resources are for gaining a better understanding of the business. These sources may include photos, overviews, and specific aspects that are particularly relevant- both objectively and subjectively.
What analysis strategies are used during due diligence?
A SWOT analysis should be conducted to study the competitive landscape. A SWOT analysis identifies strengths, weaknesses, opportunities, and threats and shows where the company stands within the SWOT matrix.
Additionally, another crucial step is to identify potential contingencies. Depending on the risk factors, these could affect the investment’s viability, potentially impacting the price, guarantees, and contract terms.
What is an example?
The average payment period DPO (Days Payable Outstanding) and the collection period of the company. This involves investigating the company’s established policy regarding outstanding payments or collections to clarify these controls and how they might influence the final acquisition price.
Depending on how contingencies or risks are analysed, the due diligence report can increase in cost.
In this case, the client will be responsible for defining the scope of the due diligence review. In this sense, conducting a general review rather than a specific one would clearly result in a greater workload. Therefore the increased time and effort invested by the lawyer in the project would be lead to a higher engagement fee.
What is the client’s role?
Therefore, a comprehensive and detailed analysis of contingencies is necessary. The client will inform us of all requested information.
The client’s role varies and changes drastically depending on whether they are dealing with the transaction as a buyer, seller, financier, or even guarantor.
What else impacts due diligence?
1) First, within the structure of the operation, we may also encounter different types of transactions such as share purchase and sale, asset purchase and sale, merger, listed company structure, etc.
2) Secondly, among other aspects of the review, the legal structure for the company— that is, depending on the nature of the company, whether it is a public limited company (S.A.) or a private limited company (S.L.)- could indeed involve the transferability of shares or equity interests.
3) Thirdly, another complex aspect is whether the scope includes just one target company or a group of subsidiaries/ companies.
4) Fourth, it is also notable whether this is a multi-jurisdictional transaction, potentially affecting several countries.
5) And finally, a fifth factor to consider is the company’s business activity—is it focused on production, or does it simply provide services? It’s also important to consider the regulatory framework governing the sector- which sector would regulate this activity (which sector is it regulated under)- is it the consumer goods or technology industry?
Be sure to check out our next video, which provides a comprehensive checklist of what not to miss during your due diligence. Remember, while there are many factors to research and consider, the effort invested in the due diligence analysis process will protect your investment and prevent future disappointment: success is in the details.
Ipso Facto Law 
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