Due diligence is the investigation which aims to analyze company business information before an extraordinary operation: a short guide
The due diligence takes place through an accurate investigation which has the purpose of researching and analyzing detailed information in the economic, tax and real estate fields before carrying out any extraordinary operation.
It serves the purpose of preventing any critical issues that may arise following the conclusion of a negotiation, due diligence is used to verify the feasibility of an extraordinary financial plan, or to assess the conformity of an asset with respect to the laws in force or, again to check the status of tax obligations borne by the company.
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Depending on the sector in which it operates, it is possible to identify different ways in which the due diligence takes place in:
The real estate due diligence, which pertains to the real estate sphere and aims to assess the congruity, the conformity of a property or real estate with respect to the urban planning, construction and land registry laws in force, its degree of exploitation and its economic utility to the inside the company.
Let’s look at other categories of due diligence in the legal, accounting and tax sector.
The legal due diligence allows to acquire, through a preventive study and observation activity, information about a potential conclusion of a deal in order to prevent risks, but also in order to prepare clauses, conditions and contractual terms.
Legal due diligence presupposes the signing of a letter of confidentiality with which the parties bind their consultants not to disclose the confidential information that they have come to know by virtue of the assignment given to them and by means of the nature of the deal.
The accounting due diligence aims to obtain information on the asset, financial and economic nature of the target company in order to provide the client with a solid basis during the negotiation and allows him to insert contractual clauses and conditions during the execution of the operation.
Accounting due diligence can be carried out directly by the client; however, external professionals are used who are also able to express judgments independently.
In fact, we turn to auditing companies or specialized service companies that, within their structure, have the human resources and professionalism necessary to complete the due diligence tasks.
After identifying the professional, or the team of professionals, it is necessary to define the assignment, outline the different roles and responsibilities and, finally, prepare the appropriate mandates.
The fiscal due diligence uses specialized consultants who verify the accuracy and control:
In fact, Legislative Decree no. 472/97 on administrative and tax penalties, has led to a significant request for fiscal and accounting due diligence interventions, i.e. limited due diligence interventions aimed at verifying the existence of criminal risks and potential liabilities that could weigh on the company transferee.
One of the most important changes of the new regulation consists in the possibility for the transferee to limit his responsibility by requesting the two types of certificates mentioned above to be sent to the competent financial offices.
Tax due diligence can be divided into two phases:
with which the specialized consultants carry out investigations and tax checks, on the declarations, on the payment of taxes, on the ongoing disputes, before carrying out extraordinary operations, such as mergers, demergers, sales of business branches.
is carried out after the conclusion of the extraordinary operation in order to verify any changes on the negotiated price or to evaluate the economic and equity status of the company consequent to the end of the extraordinary operation.
Due diligence is a preventive tool that helps us avoid bad surprises due to the lack of knowledge of the fiscal, economic, financial and property situation of a company with which we want to conclude a deal.
Therefore if on the one hand those who want to carry out business or extraordinary acquisitions recognize tax due diligence for its usefulness because it manages to bring to light any anomalies, critical issues or risks that may invalidate the conclusion of the transaction, on the other hand , the same fiscal due diligence, it must not be forgotten that it has limits.
First of all, tax due diligence is not configurable to an audit engagement; nor does it provide a public report on the legitimacy or otherwise of the examined financial statements, therefore caution should be exercised and caution should be exercised because the results derive from the analysis of documents and data provided by the target company which have an interest in concealing more than in making any discrepancies emerge.
Therefore it is essential to provide and insert contractual clauses, as a form of protection, as well as to carry out a fiscal post due diligence.
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