Free Essay Example on Due Diligence

Introduction

Due diligence is described as an audit, review, or investigation performed to assure a matter under a given consideration. Due diligence needs a proper examination of the business sector's financial record before any party enters a proposed transaction with a given party. However, due diligence is not mandated by the UAE law. It is highly recommended for the buying entity to ensure that extensive due diligence for the constructive and the actual liability of the target entity is properly performed. As a result of this, the regulatory approvals and the restriction on the transactions involved become clear to the purchaser.

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How to Perform Due Diligence

Due diligence is performed by organizations and companies that are considering taking am acquisition of other organizations. It also entails the provision of equity research analysts, broker-dealers, fund managers, and individual investors. Due diligence that is carried out by and the individual investor is mostly voluntary. However, in the case of broker-dealers, they are legally obligated to properly conduct due diligence on the company's security nature of the organization before they release it out (Leibe, 2014). Below are some of the steps that need to be considered for any person that might consider investing in a start-up company:

Analysis

An organization's total value or market capitalization generally indicates the volatility of the market price, the company's potential capacity and size, and how broad the company ownership is, which are vital consideration of the due diligence.

The Profit, Revenue, and Margin Trend Analysis of the Company

The company's consideration or the organization's income statement will enable the investor to know the revenue or its profits and net income. It is vital to take a close look at the company operation expenses, revenue collection, return on equity, and the profit margins.

Research Analysis on the Existing Competitors

It is very important to size up how the company operates and its competitive environment. Most of the companies and organizations are defined concerning their competition. Detailed information needs to be gathered to ensure that the company or the organization is a leader within the industry or its specific targets. Understanding the company is growing considerably.

Expectation

The investor must have detailed research on the consensus of the wall street and the relation of the same to the earnings, revenue, growth, and profit estimates of the company for the next two to three years of its operation (Jallab Abdelmalki & Sandretto, 2007). The investors should also understand the long terms goals and trends that might affect the industry together with the company's detailed news concerning the partnership, intellectual property, joint ventures, and new products or services offered by the company.

Important Points of the Acquisition Contract

The acquisition contract is very vital, more so for detailing a given transaction that is performed between two or more parties. Even though the acquisition contracts are always not legally enforceable within the court of law, they are very important because they can often prevent disputes (Jain, 2016). Some of the most vital points of the acquisition of the contract are:

The Description of the Intended Deal

This will entail the description of the products purchased when the payment of the purchased products will be made together with the structure of the acquisition process.

Warranties and Representations

This clear statement of assurance and facts that all the parties negotiate will make them determine the quality of the products. It also the natures of the products, and the risks of whatever kind of item that it is being purchased in the agreement process.

Covenants

This is the promises that are made by the parties to take various actions before and after the closing of the acquisition contract

Condition

This point within the acquisition contract entails what should happen before any of the parties involved in the agreement deal are obligated to finish and close up the deal.

Indemnification

These points within the acquisition contract deal with the breaches' allocation more so for the covenants, warranties, and representations.

Termination

This will generally entail the agreement on how the involved parties can walk and departs out in the process that the deal is not closed together with the consequences of walking out of the deal.

Conclusion

The main objective of drafting a basic observation and the action point within due diligence is to create awareness or raise flag concerning a gap of information or non-compliance or additional contests. This might be required from the third party, and it is not known until the points it was raised with the due diligence report (Cumming, D., & Zambelli, 2016). Therefore, if it comes to the drafting of the action points, the lawyers need to keep one main thing that the due diligence report prepared before the actual transaction needs to be discussed amongst a class of people who should not necessarily be lawyers. The action points are generally stated in the point. The main point of the same is for internal communication that will allow the investee company to rectify any abnormalities that might exist (Farhat & Benati, 2018).

References

Cumming, D., & Zambelli, S. (2016). Due Diligence and Investee Performance. European Financial Management, 23(2), 211-253.
https://doi.org/10.1111/eufm.12100

Farhat, A., & Benati, A. (2018). The effects of motivation on processing instruction in the acquisition of Modern Standard Arabic gender agreement. Instructed Second Language Acquisition, 2(1), 61-82. https://doi.org/10.1558/isla.34879

Jain, S. (2016). Due Diligence Framework for Direct Investing. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2765181

Jallab, M., Abdelmalki, L., & Sandretto, R. (2007). The Free Trade Agreement Between the United States and Morocco: The Importance of a Gradual and Asymmetric Agreement. Journal Of Economic Integration, 22(4), 852-887. https://doi.org/10.11130/jei.2007.22.4.852

Leibe, B. (2014). International Legal: Detecting Foreign Corrupt Practices Crucial to Due Diligence in Acquisitions. Natural Gas & Electricity, 31(2), 14-18.
https://doi.org/10.1002/gas.21782.