Due diligence is an effort made by individuals with common sense to avoid other people and property owned from things and bad events. The term feasibility test is more commonly found in the business world, especially before the process of acquisition, investment, lending, or before making a purchase.
This due diligence process is carried out to protect both parties, especially the buyer. This feasibility test will explore various information in detail and depth. Due diligence is an important part in trying to find out whether there are financial problems that are not visible, to check things that are indicators of errors in financial reporting, and to ensure that no information is covered up.
The due diligence process itself will vary according to the type and type of business, as well as the situation. For example, the due diligence process carried out for the purchase of commercial property will certainly be different from the purchase of a company.
The Process of Implementing Due Diligence
Basically, the process of implementing due diligence is centered on efforts to check the suitability of the reports provided with the facts that occur in the field. This feasibility test is carried out before a formal sale and purchase agreement is agreed and signed by both parties.
Therefore, this process needs to involve both parties, namely the seller and buyer, where each party can be accompanied by lawyers, accountants, and third parties such as consultants who provide services in the form of feasibility tests such as those conducted by Logiframe.
The due diligence process involves various things. Buyers need to check various types of documents such as sales documents, assets, documents relating to legal issues, checking conditions of existing facilities, conducting financial statement analysis, as well as various other aspects.
The due diligence process will not miss any aspect of either positive or negative aspects. In this way, all facts will be presented on the table as a consideration for the buyer before deciding whether to continue the transaction or not.
Work Area from Due Diligence
This due diligence work area covers various aspects. Some people call this the type of due diligence.
In conducting due diligence, there are so many aspects or work areas that need to be explored. This time we will discuss some of the work areas that most often get attention. Again, it should be emphasized that this work area can change according to the subject, situation, and conditions that exist.
Due diligence in finance
From so many work areas aspects of due diligence, the financial sector is the most important aspect.
Matters examined in due diligence in the financial sector were conducted to see whether the financial data provided was truly accurate or not. This examination includes various things, namely:
- Data on financial audit results over the past few years.
- Latest financial data.
- Spending plans.
- Inventory list.
- List of debtors and creditors.
- Analysis of customer account data.
- Analysis of profit margin.
- Analysis of sales channels.
- The ability of the company or business in processing existing debt, as well as debt repayment plans. An effective debt management plan is one of the financial management strategies that is proven to be able to increase profits.
- The overall capital structure of the company.
Tax Due diligence
Tax due diligence is carried out to find out all types of taxes that are the policies of the business, calculation of the amount of taxes, and various problems related to taxes.
Things that are generally done in the due diligence process in this taxation area include:
- Data collection on tax payments over the past few years.
- Various information related to tax issues, such as delays or tax arrears.
- Collection of other data relating to tax agencies that work with the company.
Legal Due diligence
The legal due diligence process is carried out in various ways, namely:
- Examination of various types of documents in the form of contracts and cooperation agreements carried out by the company with other parties.
- Review of various certificates, for example, certificates that discuss profit sharing.
- Comprehensive examination of various matters that have risks in the legal or legal fields including contracts, assets, intellectual property, company status, and security from the company.
Due diligence in the Field of Administration
All matters relating to the administrative sector such as facilities, number of work desks, as well as various other equipment are included in the due diligence work area. This is done to ensure that all operational costs related to the administrative field have been included in the financial statements or not.
Due Diligence in the Field of Assets
All types of assets owned by the company also need to be tested for their feasibility. Things that need to be examined are the type of assets owned, location, notes on borrowing equipment and company equipment, data on sales and purchase of assets on a large scale in recent years, warehouse management as a place to store goods, real estate property, licensing issues, and also name of asset ownership.
Due Diligence in the Field of Environment
Feasibility testing or due diligence in the field of environment also needs to be done. Why?
Public attention to the environment has been increasing lately. If a business or company is considered to violate the code of ethics and regulations relating to the surrounding environment, the authorities can impose sanctions on the company.
Feasibility tests in the environmental field generally include the following:
- Checking the permits and regulations in force in the area and ensuring that the company has followed the rules.
- Examination of the disposal system carried out by the company, whether it is in accordance with the procedures set by the government.
Due Diligence in the Field of Human Resources
Human resources are an important and inseparable part of a business and company, so it is not surprising that the due diligence process also needs to be done in this one field.
The type of examination carried out can cover a variety of things, including:
- Data from all employees working within the company, along with various additional information such as work position, position, retirement time, and total time worked in the company
- Company policy related to the permission or absence of employees
- Analysis of various problems that have occurred with employees, such as discrimination, harassment, demands that are not met, and various other issues related to the legal aspects.
- Analysis of salary and allowance data provided to employees, and not to forget the problem of employee tax reporting.
Due Diligence in the Field of Intellectual Property
Intellectual property is basically an asset of a business or company, where these assets are used to increase profits. In the due diligence process, there are several things that need to be examined related to intellectual property, namely:
- Types of patents owned and how they are used
- Documents relating to filing patents and copyrights
- Analysis of claims made by the company or by other parties against the company regarding violations of patents and copyrights
Due Diligence for Customers
Customers are a source of income from a business. No wonder the feasibility test related to these customers also needs to be done. In this case, some checks carried out could include:
- Customer protection agreement, money back guarantee, and insurance.
- Ongoing credit policy.
- Data relating to the loss of customers over the past few years.
Again, it should be stressed that the work area of due diligence will depend on the type of company, situation, and conditions that exist. Apart from this, an examination like this indeed needs to be carried out thoroughly to be able to obtain truly detailed and in-depth information about the condition of the company.
Based on information from this due diligence process, the buyer can make the best decision regarding the transaction they will carry out. In addition, they can also begin to develop plans to improve and develop the company from an early age.
Implementation of Third Party Due Diligence
Who has the right to carry out this due diligence process? Basically anyone who has the knowledge, ability, and competence in conducting the due diligence can do this process.
However, there are at least 3 reasons why this due diligence should be left to a third party such as a consultant who is specialized in the field of due diligence, such as Logiframe.
- Third parties in the form of due diligence service providers such as Logiframe are able to see the situation and conditions more neutral and do not side with any party. The results of the reports provided will also be more objective.
- Not everyone has access, energy, resources, knowledge, and time to conduct this feasibility test themselves.
- The next reason is the problem of access to data and information. In some cases, it is not easy to find all the data and information needed to conduct a due diligence.
For example, a buyer who wants to make a purchase of a company outside the region is certainly hampered by various problems, for example the absence of assets in the area. Consultants for due diligence services generally have a database to access the data needed.
In addition, due diligence service providers such as Logiframe can combine various methods to get the data and information needed. The data can come from databases, from agents who work directly in the field to be able to extract hidden information, or from various other bureaucratic sources.
The due diligence process is a long and tiring process. This due diligence process will reveal all data and information that was previously undetected.
The results of the feasibility test itself are not always satisfying and in accordance with the wishes. However, regardless of all of these possibilities, it is very important to carry out really deep and thorough due diligence. In this way, prospective buyers will be able to detect problems that exist, and maybe also find a variety of potential that was not previously realized.
Logiframe is ready to help those of you who want to invest and buy a business or company, by doing due diligence that will answer all your questions about the company.