Due Diligence: What You Need to Know (2024)

What is due diligence?

Due Diligence meaning or the definition of due diligence: the concept of due diligence enshrined in German law refers to the exercise of reasonable care in the course of business. Adue diligence checkinvolves careful investigation of the economic, legal, fiscal and financial circ*mstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion. A check of this sort is necessary as soon as a company initiatesrelationships with business partnersor plans tobuy up another company or a property or makeinvestments in real estate.

According to Cambridge Dictionary, the meaning of due diligence is: “The detailed examination of a company and its financial records, business transactions, done before becoming involved in a business arrangement with it.”

Why is due diligence important?

Due Diligence is an important business technique to consider before making any key business decisions or acquiring a company. Before you put your company finances into action, you need to understand its due diligence and how to do it correctly.

Why do companies and organizations need a due diligence check?

Due diligence risk and compliance check tool helps companies protect their interests, for example in the context of M&A activities, to safeguard the value chain or comply with sanctions and with legislation on the prevention of bribery and corruption. Due diligence andcontinuous market monitoringhelp companies in four ways:

• Taking legally required steps toprevent corruption, to assess risk and to screen business partners and subcontractors involved in international cooperation:

Legislation such as the UK Bribery Act and the US Foreign Corrupt Practices Act (FCPA) on the prevention of corruption is binding on German companies if they are directly or indirectly represented in these countries. They must therefore protect themselves against being linked to bribery or other forms of corruption via a business partner or a subcontractor within the supply chain.

Companies and organizations that are not internationally active are also subject tolegislationsuch as the GWG.

• Preventing financial consequences:

Working with business partners who lack the necessary integrity can lead to heavy financial due or penalties and even prison sentences.

• Preventing reputational risks:

Companies that are linked to economic crime risk severe damage to their reputation. Even if the company itself meets ethical and legal standards,inappropriate behavior by business partnerscan still damage its reputation. In recent years there have been a number of examples of well-known companies whose suppliers have been found to be involved in practices such as dubious or illegal working conditions in China.

• For economic reasons when buying or merging with companies and organizations:

What does a due diligence check look for?

Both existing and potential business partners and their subcontractors as well as the responsible persons are assessed and reviewed. Among other things:

• Head Office
• Red flags
• Negative reporting in the international press
• Sanctions lists with regard to persons or companies involved
• PEP lists (Politically Exposed Person) with regard to persons involved
• Results and balance sheets
• Assets and liabilities, budgets
• Work processes
• Qualification of employees
• Company image
• Quality control
• Board members, shareholders, beneficiaries
• u.v.m.

Who conducts due diligence checks?

Who needs ongoing due diligence monitoring?

While a due diligencecheck is needed for all companies and organizations if they engage incompany mergersor acquire stakes, property, real estate, investment, investors or insurance transactions in other companies, or If they work with business partners, especially in an international context.

An ongoing due diligence is required for all your business partners, vendors, buyers & sellers to ensure compliance.

Who helps companies with due diligence checks and monitoring?

Because of the complexity of the requirements it is advisable to call on trained staff (in-house employees, risk and compliance analyst) or external advisors (tax consultants, auditors, lawyers, technical experts, management consultants) to perform a due diligence check. There are also due diligence checkliststhat provide a good (initial) overview of the subject. However, they do not always cover the specific circ*mstances.The due diligence costs may be tax-deductible. For corporation tax purposes, the due diligence costs can be deductive if they are:

• charged to the profit and loss account and,
• are for good use of the trade or business.

As a general rule,the greater the potential risk, the greater the resources that should be invested in a check.

How can LexisNexis help with due diligence checks and monitoring?

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