Due diligence is the process of discovering information necessary to make investment decisions.

If a company has an investment project, it should know the details of the subject of purchase and that due diligence ought to contribute to a proper risk assessment and ultimately determine the purchase price. The most common types of due diligence are:


  • Financial
  • tax
  • legal
  • personnel
  • Information Technology
  • technical
  • and more..


Primarily Due Diligence is dealing with of profit, which seeks to eliminate one-time or extraordinary influences, while working with EBITDA (earnings before interest, taxes, depreciation and amortization), which is suitable for trend analysis. Assessing trends in revenues, which can be dependent on accounting policies, pricing, changes in sales mixes and seasonal sales is of utmost importance. It is also considering margins for individual products and customers and the actual policy setting margins.


Customers and suppliers

As for the customers, Due diligence focuses on the concentration and stability of a companys’ customers, if the company is not dependent on a few large customers, then it could pose a risk in the case of loss of any of these key customers. They are analyzed in detailed contracts with major customers, of which the company may have some obligations and limitations. It is also investigating suppliers, which are pursuing similar risks as customers or propose of alternative suppliers in case of an unsatisfactory present. Especially here is assessed the relations with related parties.


Another important aspect is ​​personnel (can also use staffing) costs, which leads to an analysis of the average cost per employee, remuneration policy and its impact on the results of the company, any restructuring and the resulting liabilities related to the departure of existing staff but on the other hand, the strategy for retaining key employees. Finally it is reviewed by a collective agreement and possible consequences arising thereafter.


For tangible assets Due diligence is trying to evaluate depreciation and valuation policies, own and leased assets, the age of the structure, any inevitable investment for new assets and an assessment of effectiveness under construction, it also focuses on non-operating assets, and its market valuation on unused property and its eventual disposal. Further attention is primarily goodwill, leases and long-term financial assets.

Current assets from the Due diligence pursued mainly because of an aging analysis of receivables and inventory, evaluation of provisions for receivables and inventory of turns inventory and accounts receivable, inventory valuation, excess or obsolete inventory. (I’m not sure i understand this fully)


Further to the analysis of loans and advances in assessment of contractual liabilities, the potential risks of their resignation or early repayment. Creation of reserves will be examined, including the use of a dissolution.

Cash flow analysis is crucial to assess the solvency of a company. An important indication of the efficiency of the financial management is the working capital. It must also take into account any possible capital expenditures. Consideration is taken on the firm’s ability to pay dividends.

Forecasting financial results need to be familiar with the main assumptions with which the company management has worked in the drafting of the plan. One of the procedures within Due diligence is to compare plans from the previous years with the achieved facts and assess the accuracy of the planning method.

Tax Due diligence should draw attention to the potential tax risks related to the transfer prices within a group of companies which have a set tax policy and the potential impacts of tax audits. It also deals with the application of tax losses.

And what should be the main conclusion of due diligence?

Due diligence should provide an investor with substantial information, enough to make a more informed decision whether to go through with the acquisition or not. If the conclusion of the acquisition occurs, it should also give inform the prospective investor on the purchase price and ultimately obtain important information for drafting the purchase agreement.