M&A Blog Petr D.

Transaction Glossary: Due Diligence

Due Diligence is a comprehensive assessment of a company prior to acquisition, concentrating on legal, financial, and tax risks. It assists both the buyer and the seller in minimizing

The term Due Diligence has entered the Czech business environment from the USA, and since two words would not suffice for its substantive translation, it has also become established in our context. If we were to translate Due Diligence literally, the term would sound like "appropriate attention." However, what should we envision when considering this appropriate attention?

 

When acquiring companies, the buyer has no legal guarantee that the company is operated properly, in compliance with legal regulations, and that its assets and activities truly hold the value demanded by the seller. Conversely, the seller can conduct a review during the sale to align the company's processes with the buyer's perspective.

 

It is, therefore, a type of review of the company being sold or acquired, primarily aimed at obtaining information to create a comprehensive understanding of the company, objectively determine its price, and subsequently make an informed decision. Due Diligence can be conducted in relation to various areas, but it is most commonly performed in the legal, financial, tax, personnel, technical, and IT domains. When acquiring a company, it is often assessed comprehensively from multiple perspectives.

 

It is up to the parties to determine how deeply they wish to conduct the review of the target company's activities. Due Diligence typically focuses at least on legal, financial, and tax areas. However, the scope of Due Diligence will always vary. For example, in the case of acquiring operations in a factory, significant attention will also be paid to issues of safety and health protection at work, fire prevention, and any specific risks associated with operations. Such risks would not receive the same level of attention when acquiring a company focused on software development.

 

Legal and tax reviews have a special nature, aimed at assessing the company's compliance with legal and tax regulations and potentially also assessing the seller's authority to transfer shares in the target company. Discrepancies found may impact the reduction of the purchase price, the introduction of specific warranties, or the withholding of part of the purchase price.

 

When acquiring capital-intensive projects, it is also advisable to conduct financial Due Diligence, aimed at assessing the financial health of the company and subsequently determining the method and payment of the purchase price, even if the actual transfer of the company or payment of the purchase price is to be realized later.

 

However, conducting Due Diligence does not solely protect the buyer but also the seller. Its execution not only increases the potential buyer's confidence but also eliminates any future dissatisfaction with the acquisition and mitigates the potential extent of their liability for defects and hidden flaws in the matter.

 

We would be pleased to provide you with more information about Due Diligence, and if needed, we can share contact details for service providers offering these services.