The Process of Due Diligence
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A 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.
"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.
The 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.
The 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.
Brief 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.
The 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, Marketing, Controls.
Must include the
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 future.
services and their uses.
Comparison of the
firm's products and services to those of the competitors.
guarantees and after-sales service.
Development of new
products or services.
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.
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.
regarding the markets, the clients and the competitors.
A sales forecast by
The pricing strategy
(how is pricing decided).
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.
advertising campaigns (including cost estimates) - broken by market and by
Distribution of the
A flow chart
describing the receipt of orders, invoicing, shipping.
service (hotline, support, maintenance, complaints, upgrades, etc.).
(example: churn rate and how is it monitored and controlled).
Full name of the
Ownership of the
Copies of all
protocols of the Board of Directors and the General Assembly of Shareholders.
backed by the appropriate decisions.
(statute) of the firm and other incorporation documents.
Copies of licences
granted to the firm.
A legal opinion
regarding the above licences.
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.
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:
Cash Flow statements;
(preferably done according to the International Accounting Standards, or, if
the firm is looking to raise money in the USA, in accordance with FASB);
Projections and the assumptions underlying them.
Methods to price
products and services;
collections of debts and ageing of receivables;
international accounting standards;
Monitoring of sales;
Monitoring of orders
Keeping of records,
Budgeting and budget
monitoring and controls;
(frequency and procedures);
(frequency and procedures);
The banks that the
firm is working with: history, references, balances.
manufacturing processes (hardware, software, communications, other);
Need for know-how,
technological transfer and licensing required;
equipment, software, services (including offers);
(power, water, etc.);
communications (example: satellites, lines, receivers, transmitters);
sources, cost and quality;
suppliers and support industries;
or licensing (where applicable);
and how they are addressed;
Integration of new
operations into existing ones (protocols, etc.).
A 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.
This material is copyrighted.
Free, unrestricted use is allowed on a non
The author's name and a link to this Website
must be incorporated in any
reproduction of the material for any use and by any means.
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