Due Diligence / Business Plan

Over the last few decades, risk capital (venture capital, private equity etc.) has become increasingly important. Alongside new financial instruments, many special expressions have become part of everyday language, including the terms due diligence and business plan.

Due Diligence

Due diligence stipulates the “suitable thoroughness” with which the purchase or sale of assets, real estate or an IPO (initial public offering) is checked in the run up to the purchase or IPO. Important aspects of due diligence surveys include the systematic evaluation of the strengths and weaknesses of the cost object, a risk analysis of purchase and IPO-related issues as well a methodical evaluation of the cost object. The usual checking method used is the EFQM. Further reasons for the report are to examine the balance sheets, personal and material resources, strategic positioning, legal and financial risks and encumbrances.
Particular care is paid to the identification of so-called “deal breakers” i.e. data that could prevent the deal from going through. Examples include contaminated land when buying plots or unsettled trademark rights during the purchase of a company. Once identified, risks can either trigger a breakdown in negotiations or be the basis for a contractual concession in the form of markdowns or warranties.
Political due diligence becomes very pertinent in multinational takeovers (negative example: E.ON/Endesa).
The starting point for proceedings is a letter of intent which arranges an appropriate period of time for the due diligence survey. Additional factors which play a role in the agreement include acquiring the rights to regular access of important data as well as stipulating the payment of a penalty if the purchase fails to take place. Milestone reports, which summarise the status quo of the project, are of particular help in due diligence.
Depending on the complexity of a report, not only experienced lawyers and chartered accountants are necessary, but also consultants with specialist expertise such as IT pros, architects or surveyors. According to the size and industry of the company making the purchase, 20 due diligence teams with additional team members are quite possible.

Business Plan

A business plan is a written summary of a corporate project. Based on a business concept, strategies and targets that relate to the production, marketing and financing of a product or service are outlined. Furthermore, all operational and financial aspects also need to be touched upon.

A business plan is a tool which helps its creator formulate strategies and objectives by facilitating a structured approach and forcing concrete decisions to be made by putting them into writing. That said, a business plan should not be an inflexible text, rather a document with the potential to develop.

A business plan also serves to advertise a business concept and sell it to the outside world. From the plan it is clear that money can be earned from the described product or service. It also forms the initial communication that leads to exchanges with banks, public authorities, public funding bodies, venture capitalists, business angels, consultants, collaborators, guarantors or executives.