Due Diligence & Why It Matters

Due diligence is probably one of the buzzwords of the 21st century. And there is a good reason for it. After all, we live in an era of digital transformation where information is easily available, but its veracity itself is in question. Before entering into a business transaction, it is essential that the parties learn more about each other and confirm all relevant facts. This helps them ensure that the transaction proceeds smoothly while avoiding unnecessary risks. Such investigative process is known as due diligence.

Due diligence is a comprehensive examination and risk assessment of all aspects of an upcoming business transaction, such as an investment, merger, acquisition, joint partnership, licensing or other business relationship, typically undertaken prior to agreeing the final value and signing of the contract / agreement terms. Every aspect of the business operations should be subject to due diligence – financial, commercial, operational, tax, IT, environmental, regulatory, HR, and so on.

Al-Rustom Law Office is an international law company that leads the way with our high customer satisfaction rates and the immense opportunities we can bring to our clients in UAE, France, Syria, Lebanon and Iran. We deliver a wide array of best-in-class international legal services, including – but not limited to – due diligence. Get in touch with our experts to see how we can help you avoid risks and guarantee success as you make your next business transaction.

Objective & Core Benefits of Due Diligence

Misstated or concealed information can leave businesses wide open to fraud. Al-Rustom Law Office helps businesses eliminate risks and deliver peace of mind. By uncovering potential legal issues and hidden threats, our comprehensive due diligence services can save clients from substantial monetary losses, reputational damage or lawsuits. We also help identify any matters that could give rise to unexpected liabilities in the future – allowing the parties to ensure fair terms and make well-informed decisions about whether and/or how to move forward with the deal.

Typically, the investor / buyer investigates the seller, but due diligence is beneficial to both parties as it enables them to examine and assess the value of the other side’s assets, liabilities, operations, legal documents, and business relationships to verify the pertaining information and respond accordingly.

What Due Diligence Offers Investors

Due diligence keeps buyers/investors on the safe side and offers them peace of mind that they're making the right deal and have all the information they need to make a good purchasing decision. This information can include learning more about the target company's existing customers and partner relationships to either validate positive assumptions or alert them about potential irregularities.

What Due Diligence Offers Sellers

Due diligence empowers a business owner to take a deeper dive into the financial integrity of their business to help them uncover the fair market value of their company. As valuations and acquisition prices are only going up for many business sectors, it's essential that business owners invest in quality due diligence services and reporting.

After all, the transaction is usually conditional upon the due diligence stage being completed.

The Due Diligence Advantage

Due diligence offers investors and business leaders several advantages as they help them:
  • Identify matters that could be potential deal breakers.
  • Paint a fuller picture of the scope of the transaction, including discovery of previously unknown problems and assets
  • Identify any issues that the business may be able to tidy up prior to settlement, for example unregistered leases.
  • Create greater awareness, clearer expectations, and increased comfort for the buyer and seller of what’s expected of them to close the deal.
  • Reduce the knowledge gap between buyer and seller, leading to better-informed decisions.
  • Reach more accurate pricing, since the initial offer could rise or fall depending on what due diligence
  • Re-negotiate the terms of the deal to a more suitable price where issues have been identified.
  • Back out of a deal if due diligence uncovers problems that are too big or complex to address.
Whether you're looking to acquire or merge with a company, establish new partnerships, license a product, or make any kind of deal with another party, due diligence is an essential procedure that must be taken into consideration.

Types of Due Diligence

As due diligence is such an in-depth inspection, there are many different types of due diligence that can apply, namely, administrative, financial, HR, legal, environmental... etc. The importance of each will vary according to the industry and the type of transaction. When done properly, each type of due diligence will support and inform the parties for an integrated approach. Ultimately, all the different types of due diligence have the same end goal. They provide businesses with the information they need and the confidence that the transaction is worth pursuing. Let’s have a quick overview at the most common ones:

1- Commercial Due Diligence

Commercial due diligence (also called market due diligence) is a critical step in validating the strategic aspects of an opportunity. It aims to assess the financial viability and real value of a business transaction.  It also analyzes budgets, profit margins, capital adequacy, fixed and variable costs, loans, competing companies and so on. Without commercial due diligence, neither party can claim to know the relative position of the business, whether there are any impending threats to the business model, or how to navigate the post-deal industry landscape with success.
Our approach to commercial due diligence at al-Rustom law firm is adapted to individual client requirements. By focusing on key issues crucial to the investor, we enable our clients to both address potential market risks in the target’s valuation and recognize the target’s unrealized growth potential.

2-Financial Due Diligence

Financial due diligence, also known as accounting due diligence, is a crucial assessment of the financial health of a business. The aim of this process is to establish future forecasts and identify any potential risks. Analyzing a target company’s relevant sources of value and risk can greatly promote an investor’s chances for a successful business transaction. We start by putting the company’s historical and current financial performance under the microscope so we can determine whether the financial information is true and accurate.
After all, our Financial Due Diligence approach is tailored to support the deal decision making, negotiation, and eventually, post-announcement planning and execution, mainly targeting valuation related aspects of the deal. Ultimately, this helps the buy-side to get a better understanding of the company’s core performance metrics and act accordingly.

3- Administrative Due Diligence

In an effort to ensure that operational and administrative costs are covered in the financial deal, we conduct an administrative due diligence study through which we inspect the facilities of a company (such as occupancy, facilities, workstations… etc.) to see if all the active costs are presented in their financial statements or not. This can also help identify any potential costs for expanding or downsizing the operation following the acquisition. Al-Rustom law firm also ensures our administrative due diligence service gives the investing company a picture of the operational costs it would incur if it goes forth to pursue expansion of the target company.

4- Asset Due Diligence

Asset due diligence is a process that requires a complete a physical check of a company’s assets, which not only include real estate but any machinery, plant equipment, vehicles and other items that are owned or used by the business. Based on this in-depth examination we come up with comprehensive report covering a detailed schedule of fixed assets and their locations, a detailed list of sales and purchases of major capital equipment of the past three to five years, mortgages, real estate deeds, title policies and use permits. We will also look at lease deals, outstanding payments and even the condition of assets, as well as documenting the current value of them.

5- Human Resources Due Diligence

With staff being the most precious asset of any business, HR due diligence is an extensive process that’s as critical as financial due diligence. Based on the size of the workforce and the complexity of their contracts, auditors will look at the total number of employees, salaries and bonuses paid in the past three years, and all contracts between the business and its employees. Employee grievances, issues, ongoing disputes, and the annual sick and holiday leave of employees will be analyzed as well. Human Resources due diligence will not only look at existing contracts but also consider the future impact of any outstanding action between the business and its workforce.

6- Taxes Due Diligence

Tax discrepancies can be hugely problematic and expensive for a business. Responsibility for meeting tax requirements will fall on the new owner following a merger or acquisition. Therefore, Taxes Due Diligence is vital to check whether the next future investment is risk-free. Auditors will review the following:
  • Every tax a company is responsible for paying, such as tax records and official statements of income and sales tax.
  • Any information relating to tax audits of the company, past or pending.
  • Taxes filed and whether there are any outstanding tax matters that need to be dealt with.
  • Tax liabilities taking into account any potential rebates or refunds that might be due.
  • Any unresolved tax-related cases
  • Any questionable interactions with the tax authorities in the past.
Furthermore, any intention to under report taxes will be uncovered during Taxes due diligence.

7- Intellectual Property Due Diligence

Every company – large or small – possess intellectual property assets they use to support and grow their business. Although intellectual properties are intangible assets, they are very useful as they comprise some of the company’s most valuable assets and differentiate the company’s products and services from their competitors. Due diligence on intellectual property assets looks at existing patents and their value, including schedule of patents and patent application, brand name trademarks and copyrights, any documents of pending patents claims and all the pending claims against or by the company in regards of violation of intellectual property. 

8- Legal Due Diligence

Since many aspects of business are bound by legal requirements, legal due diligence is of high importance. At this point, we uncover any failure to comply with any area of business law, keeping an organization safe from regulatory trouble. Legal due diligence includes detailed review and examination of everything from Articles of Association to licensing and franchise agreements as well as agreements in place with suppliers and business partners.
Al-Rustom Law Office will ensure all records are in place, including minutes from all shareholder meetings, and we will use a lot of this information to assist in other key areas of legal due diligence.

9- Customer Due Diligence

Customers are the lifeblood of any business. Therefore, a thorough check of a business’s top customers is essential as well. Customer Due Diligence analyzes the clients that make the largest total purchases as well as any important customers to the company regardless of their current level of spending. Customer due diligence also examines credit policies, agreements with customers, customer satisfaction score for the past three years and a detailed list of customers lost within the past three to five years.
Then, the auditor will look into a list of reasons why an X number of clients have left the company during this particular period. This helps assess the efficiency of accounts receivable and avoid any mistakes that can stand between the company and its goal of promoting customer satisfaction levels.
If you’re on the lookout for skilled and experienced due diligence experts who can cater to your unique requirements, then the best option for you would be to outsource due diligence services to an experienced and skillful due diligence service provider, such as Al-Rustom Law Office.
Operating in Paris, Abu Dhabi, Damascus, Tehran and Beirut, Al-Rustom Law Office is a global network of specialized experts providing Audit, Tax, Legal and Advisory services. Our due diligence services can be tailored to your needs, and our experts can assist and advise you in your legal, financial, commercial, market and operational due diligence in order to help you maximize the value from a potential transaction. Our approach to due diligence is about understanding the dynamics of the deal and the business, its motives, its value drivers, its synergies, its risks and, ultimately, its pricing. To learn more about our due diligence services and how we can assist you throughout the process, feel free to drop us a line.

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