To ensure maximum attention is paid to AML/CFT due diligence processes, due diligence is often conducted. The methodology used is the same as that used for extraordinary financial transactions.

Edited by Massimo Ferracci

The term "due diligence" can literally be translated from English as "due diligence." It is a process aimed at ascertaining and evaluating the health of a company, not only with regard to its economic, financial, and equity soundness, but also with regard to compliance with applicable laws by those who have managed the company since its incorporation.

This operation becomes necessary when the company undergoing future due diligence engages with external parties intending, in some way, to become part of the corporate structure, through the purchase of shares, the company, or simply a branch of it. In order to evaluate the opportunity and feasibility of the transaction, as well as to determine the purchase price, it is essential to ascertain the health of the "product" you intend to purchase.

It's easy to understand that the more complex and multifaceted the company's structure—both in terms of its membership and its business—the more laborious and delicate the due diligence process will be.

Due diligence, therefore, represents a delicate investigative investigation carried out in the case of extraordinary transactions, in order to offer a complete overview of the corporate reality being negotiated.

Potential buyers want to be able to make an informed decision, and due diligence addresses this very need. Acquisitions of foreign companies through qualified or controlling majorities and joint venture formation processes require careful micro-analysis to determine the economic and financial value of the foreign target company.

When carrying out due diligence, it can be very useful to use checklists, lists that segment and divide the areas of investigation, the inspections to be carried out, the documents to be examined, the searches carried out at public offices, and the appraisals of external experts that may be requested.

These lists should be considered operational guides—certainly not exhaustive—for conducting due diligence appropriately. Furthermore, they serve to communicate the analyses that will be conducted, in order to inform the buyer of the areas covered by the due diligence; therefore, they are a useful tool for requesting the target company to produce the documents that will be subject to investigation.

Given that each company examined has its own unique characteristics related to size, corporate culture, competitive climate, industry, and management, it is nearly impossible to compile a checklist that can be applied "objectively" in all situations and that replaces the judgment and experience of the professional in charge.

It must also be considered that each potential buyer has different needs.

In any case, simply applying even the most detailed and extensive checklist should be avoided, as it could unduly burden the workload. Much will depend on the buyer's strategies.

Furthermore, given the typically limited time available to carry out the assignment, there is a risk of overlooking some specific aspects of the target company that could represent the source of its competitive advantage and consequently be a key factor in determining the company's value.

Nonetheless, it is wrong to dismiss the validity of the checklist approach out of hand. If these are adapted from time to time to the specific situation under consideration and if the possibility of updating them during the due diligence process is foreseen, should previously unconsidered situations emerge, they constitute a valid support for the professional's work, who must be able to apply them critically, keeping in mind the risks they entail.

A. Documents to analyze

checklist

1. Statute
2. Constitutive Act
3. General Agreement
4. Employment contracts and social security positions
5. Accounting books
6. Minutes of the meeting
7. Company registrations at Public Offices and Registers
8. Administrative licenses and authorizations
9. Insurance contracts
10. Organizational chart and function chart
11. Business and financial plan
12. Tax declarations and communications
13. Payment notices or notifications of ongoing investigations
14. Purchase contracts
15. Sales contracts
16. Official price lists
17. Purchase invoices
18. Sales invoices
19. Possible registration of trademarks, models or patents
20. Correspondence with customers and suppliers
21. Any agency and representation contracts
22. Notarial deeds
23. Office lease agreement and its registration and additional charges
24. Current accounts and correspondence with credit institutions
25. Documentation relating to any ongoing financing or loans
26. List of defaulting debtors and customers
27. Ongoing and/or threatened litigation
28. List of lawyers in charge of debt collection
29. Indication of electronic equipment and software used
30. Safety at work
31. Compliance with environmental regulations
32. Compliance with privacy regulations
33. Compliance with collective bargaining agreements when signing agreements with employees
34. Dazi doganali
35. Analysis of entertainment expenses
36. Advertising Expense Analysis
37. Analysis of utilities and other expenses
38. List of any competitors present on the market
39. List of any consultancy contracts with professionals
40. Guarantees provided

B. Analysis to be performed

1. Identifying the evolution of the target company over time
2. Verification of the reliability of the internal control system
3. Identification of business areas
4. List of products offered
5. Warehouse turnover
6. Analysis of internal accounting and identification of direct and indirect costs, contribution margins and profit margins
7. Reclassification of balance sheet data from at least three financial years
   • Existence and completeness of rights and obligations
   • Imputation and accounting adequacy
   • Assessment
   • Economic competence
   • Representation and additional information
8. Index analysis and determination of WACC, Operating Leverage and Financial Leverage
9. Verification of the adequacy of the evaluation methods used
10. Comparison of the indicated values ​​with the market ones
11. Analysis of the tax situation and forecast of the future tax rate
12. Preparation of a pro forma balance sheet that takes into account the changes that will occur as a result of the write-downs and revaluations resulting from the transaction and for the adaptation to the valuation criteria used by the purchaser
13. Identification of research and development activities and their suitability to the company's size and image
14. Modernity of the plants and production processes used
15. Analysis of plans and budgets and preparation of alternative plans
16. Study of sales seasonality
17. SWOT Analysis
18. Examination of the quality of the raw materials used and the possibility of finding them on the market under conditions similar to the current ones
19. Analysis of marketing strategies implemented over time
20. Average percentage of returned products and warranty interventions, in relation to sales
21. Assessment of the need to proceed with a recapitalization or the possibility of proceeding with new investments in relation to the availability of equity capital
22. Target company's fit with the buyer's strategic needs
23. Identification of synergies that can be achieved following the operation
24. Assessment of resources employed and evaluation of the knowledge gap
25. Target company valuation
    • Main method
    • Control methods