What is Due Diligence?

In modern society, when a company reaches a certain scale, it will often look to continue growing its business. This involves investing in various plans or objectives, as well as corporate mergers and acquisitions. However, major investments or acquisitions are often fraught with complex and intertwined stakes. A single wrong choice or decision could result in unnecessary risks and crises, leading to financial losses. To avoid such situations, due diligence becomes even more crucial. Due diligence refers to the comprehensive investigation carried out by the investor after reaching a preliminary cooperation agreement with the target company but before signing contracts or completing the transaction. This process includes thorough research into the company’s historical data, documents, management background, market risks, management risks, technical risks, financial risks, legal records, market analysis, supply chain management capabilities, and more. It helps investors gather crucial information about costs, benefits, and risks to make informed decisions.

Financial Due Diligence: A Cautious Approach to Avoid Financial Risks

Financial due diligence has become an important development strategy for companies, especially in major investments such as acquisitions or mergers, or when attempting to develop cross-industry businesses for more revenue. This process must undergo careful and thorough risk assessment and investigation to ensure that the transaction benefits the company and avoids harm. In due diligence, there are three key principles: the principle of independence, the principle of caution, and the principle of comprehensiveness. Through third-party financial due diligence, important focus areas include the target company's financial statements, future business plans, related profit forecasts, financial risks, equity structure, cash flow, assets, and accounting policies. The goal is to assess whether there are financial risks within the company and determine the value of the investment.

Due Diligence Process Analysis

What does the due diligence process entail? The more detailed the investigation, the deeper the understanding of the target company, which allows investors to feel more secure and confident in proceeding with the investment. Initially, after the third-party firm accepts the client's commission, they will create a relevant investigation plan. The next key stage in the due diligence process is the collection of information. During this stage, the investigation is conducted through on-site visits, interviews with key personnel, and searching public sources or online channels for critical information. This allows for a more complete set of data necessary for making investment decisions. Once the collected information is compiled into an investigation report and risk assessment, it is reviewed internally before finalizing the investment proposal and related actions.

How Are Due Diligence Fees Evaluated? What Information Should Clients Provide in Advance?

Due diligence fees can vary significantly depending on the situation and the scope of the investigation. Generally, the fewer items to be investigated, the lower the fee. Sometimes, if the investment scale is not particularly large or the requirements for due diligence are not very high, only basic financial risk assessments may be needed, keeping the costs low. On the other hand, if the investment or acquisition is critical to the company, due diligence will be more thorough to avoid any preventable risks. Depending on the level of investigation required, clients and commission recipients may need to provide different information. Most importantly, clients should inform the due diligence firm about which aspects of the investigation are needed and what they expect to gain from the process, as well as providing basic details about the target company to facilitate the due diligence process.