The Process of Due Diligence
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business which wants to attract foreign investments must present a business
plan. But a business plan is the equivalent of a visit card. The introduction is
very important - but, once the foreign investor has expressed interest, a
second, more serious, more onerous and more tedious process commences: Due
Diligence" is a legal term (borrowed from the securities industry). It
means, essentially, to make sure that all the facts regarding the firm are
available and have been independently verified. In some respects, it is very
similar to an audit. All the documents of the firm are assembled and reviewed,
the management is interviewed and a team of financial experts, lawyers and
accountants descends on the firm to analyze it.
firm must appoint ONE due diligence coordinator. This person interfaces with all
outside due diligence teams. He collects all the materials requested and
oversees all the activities which make up the due diligence process.
firm must have ONE VOICE. Only one person represents the company, answers
questions, makes presentations and serves as a coordinator when the DD teams
wish to interview people connected to the firm.
your workers. Give them the big picture. Why is the company raising funds, who
are the investors, how will the future of the firm (and their personal future)
look if the investor comes in. Both employees and management must realize that
this is a top priority. They must be instructed not to lie. They must know the
DD coordinator and the company's spokesman in the DD process.
DD is a process which is more structured than the preparation of a Business
Plan. It is confined both in time and in subjects: Legal, Financial, Technical,
include the following elements:
- A brief history of the business
(to show its track performance and growth).
- Points regarding the political,
legal (licences) and competitive environment.
- A vision of the business in the
- Products and services and their
- Comparison of the firm's
products and services to those of the competitors.
- Warranties, guarantees and
- Development of new products or
- A general overview of the
market and market segmentation.
- Is the market rising or falling
(the trend: past and future).
- What customer needs do the
products / services satisfy.
- Which markets segments do we
concentrate on and why.
- What factors are important in
the customer's decision to buy (or not to buy).
- A list of the direct
competitors and a short description of each.
- The strengths and weaknesses of
the competitors relative to the firm.
- Missing information regarding
the markets, the clients and the competitors.
- Planned market research.
- A sales forecast by product
- The pricing strategy (how is
- Promotion of the sales of the
products (including a description of the sales force, sales-related
incentives, sales targets, training of the sales personnel, special offers,
dealerships, telemarketing and sales support). Attach a flow chart of the
purchasing process from the moment that the client is approached by the
sales force until he buys the product.
- Marketing and advertising
campaigns (including cost estimates) - broken by market and by media.
- Distribution of the products.
- A flow chart describing the
receipt of orders, invoicing, shipping.
- Customer after-sales service
(hotline, support, maintenance, complaints, upgrades, etc.).
- Customer loyalty (example:
churn rate and how is it monitored and controlled).
- Full name of the firm.
- Ownership of the firm.
- Court registration documents.
- Copies of all protocols of the
Board of Directors and the General Assembly of Shareholders.
- Signatory rights backed by the
- The charter (statute) of the
firm and other incorporation documents.
- Copies of licences granted to
- A legal opinion regarding the
- A list of lawsuit that were
filed against the firm and that the firm filed against third parties
(litigation) plus a list of disputes which are likely to reach the courts.
- Legal opinions regarding the
possible outcomes of all the lawsuits and disputes including their potential
influence on the firm.
Last 3 years income statements of the
firm or of constituents of the firm, if the firm is the result of a merger. The
statements have to include:
- Balance Sheets;
- Income Statements;
- Cash Flow statements;
- Audit reports (preferably done
according to the International Accounting Standards, or, if the firm is
looking to raise money in the USA, in accordance with FASB);
- Cash Flow Projections and the
assumptions underlying them.
- Accounting systems used;
- Methods to price products and
- Payment terms, collections of
debts and ageing of receivables;
- Introduction of international
- Monitoring of sales;
- Monitoring of orders and
- Keeping of records, filing,
- Cost accounting system;
- Budgeting and budget monitoring
- Internal audits (frequency and
- External audits (frequency and
- The banks that the firm is
working with: history, references, balances.
- Description of manufacturing
processes (hardware, software, communications, other);
- Need for know-how,
technological transfer and licensing required;
- Suppliers of equipment,
software, services (including offers);
- Manpower (skilled and
- Infrastructure (power, water,
- Transport and communications
(example: satellites, lines, receivers, transmitters);
- Raw materials: sources, cost
- Relations with suppliers and
- Import restrictions or
licensing (where applicable);
- Sites, technical specification;
- Environmental issues and how
they are addressed;
- Leases, special arrangements;
- Integration of new operations
into existing ones (protocols, etc.).
successful due diligence is the key to an eventual investment. This is a process
much more serious and important than the preparation of the Business Plan.
About the AuthorSam Vaknin is the author of "Malignant Self Love - Narcissism
Revisited" and "After the Rain - How the West Lost the
East". He is a columnist in "Central Europe Review", United
Press International (UPI) and ebookweb.org and the editor of mental health
and Central East Europe categories in The Open Directory, Suite101 and
searcheurope.com. Until recently, he served as the Economic Advisor to the
Government of Macedonia.
His web site: http://samvak.tripod.com
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Article Published/Sorted/Amended on Scopulus 2006-06-17 21:38:05 in Economic Articles