When is Due Diligence needed?

First of all, it is essential to define what Due Diligence is and what it consists of. The term, in its literal translation into English, means “due diligence ’ and consists of a thorough investigation, carried out by external auditors or specialists, which allows the parties to assess the opportunities and/or risks associated with a specific company or asset.

What is the ultimate objective of conducting Due Diligence?

The main objective of conducting Due Diligence is to provide all parties involved with a full and clear understanding of the entity’s financial, operational, employment, technological, compliance, intangible assets, data protection, environmental impact, prior to undertaking a significant transaction.

Depending on what you are looking for, there are different types of Due Diligence. There are comprehensive or complete due diligences that cover all the areas mentioned above, thosethat focus only on identifying the most relevant risks, as well as those that focus on a particular area.

When is it necessary to carry out Due Diligence?

At this point, it is worth asking when it is necessary to carry out Due Diligence, and here are some examples of situations:

• Mergers and Acquisitions (M&A): Before carrying out a purchase or merger of an entity, it is advisable to have a complete overview of the company’s situation in all the areas described above. This will help to determine whether the purchase or acquisition price is fair or reasonable and representative of the company’s real value, as well as to detect possible hidden risks. It also helps to identify possible synergies, how the entities can be effectively merged and helps to plan such integration or merger.
• Business alliance or Joint Venture: Knowing the risks and/or benefits of entering into a particular alliance allows an informed decision to be made and potential risks to be mitigated in advance. It is essential to have an in-depth knowledge of the entity and to determine whether the alliance entails any damage or inconvenience at the reputational level.
• Investment operations: Before making an investment, investors should carry out due diligence to understand the potential of the company and the associated risks before investing.
• Raising finance: This is an effective tool to provide greater security and confidence to investors or lenders and thus helps facilitate access to capital and growth of the entity.
• Real Estate Transactions: Before acquiring a specific property, it is advisable to verify the title deeds and applicable regulations.
• Acquisition of Intangible Assets: Before acquiring an Intangible Asset, it is important to verify its value, possible ways of protection, whether or not it is a scalable solution, among other technical issues.

Due Diligence helps companies or investors to make informed decisions that can undoubtedly have a significant impact on the viability of a given transaction. Therefore, carrying out Due Diligence is not optional, but rather essential and fundamental, helping to mitigate risks, increase the chances of success of a given transaction and build confidence.

At Metricson we are specialists in carrying out Due Diligence and we have professionals in each of the areas to advise you in a comprehensive and effective way. If you would like more information about our Due Diligence Service, click here.

Article written by:

Estefanía Asensio

Intellectual property and data protection lawyer

estefania.asensio@metricson.com