The importance of due diligence for startups

Due diligence is an analysis by external consultants to assess opportunities and risks in operations like mergers or acquisitions.

Due diligence is an analysis performed by external consultants to a company in which they examine the areas of the company and obtain the necessary data to analyze the opportunities and risks involved in a delicate operation such as a purchase and sale or a merger.

According to the definition of the Instituto de Censores Jurados de Cuentas de España, due diligence includes a specific and detailed study of the financial, fiscal, legal, labor or environmental aspects of the target company when there are interested investors or when there is a change in the management body. 

The importance of this process lies in the fact that it facilitates the decision making of the companies involved in the operation and helps all interested parties to understand each other's operations. 

According to the consulting firm WTW, due diligence increases the chances of success of the transaction and the level of satisfaction among those involved, in addition to making transparent the real state of a company's operations in order to model its future performance. 

During a sale and purchase, a due diligence helps to ratify the obligations undertaken by the seller, protecting the buyer, but also helping the buyer to identify possible internal problems.

In order to carry out a due diligence it is necessary that the party interested in acquiring or investing has access to financial statements, balance sheets and annual and quarterly cash flows. 

A detailed explanation of the company's properties and equipment with all their specifications, as well as a review of past and current financial projections regarding sales and growth should also be performed.

During the due diligence process, all tax and fiscal information of the target company should also be presented, as well as a summary of all investors and shareholders of the target company.

Due diligence is an extremely useful tool to be aware of possible hidden liabilities in the business, thus reducing the risks in the acquisition and allowing the buyer to establish an appropriate strategy to achieve the greatest economic benefit after the purchase, if any. 

It should be noted that, during the due diligence, the seller must provide all the necessary and timely information about the case, giving way to three possible scenarios: the ideal, in which the result matches the details previously provided, proceeding with the acquisition; the renegotiation, in which, despite some discrepancies in the data, buyers remain interested in the operation, or the withdrawal, when unfavorable results end with the interest to continue with the movement and the offer is withdrawn. 

Due diligence can make all the difference between the success and failure of a company, especially when it is a startup, so the process must be carried out under the highest quality standards and with full transparency. 

At Factor Tech we help UK technology SMEs to have quick access to simple capital solutions through early stage R&D funding. Our aim is to be the funding partner and work alongside them to achieve their business goals.