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Due Diligence

Due Diligence

Due diligence is an objective analysis of investment projects based on valuation of investment risks: financial and market conditions, liabilities, if any, analysis of activity of the owners and governing bodies in civil-law transactions.

As a rule, Due Diligence procedure is carried out before acquisition of business or other investment project (immovable property, interests, shares, claims etc.) in order to check the accuracy of the information presented by the owner.

You may need Due Diligence procedure in the following cases:

  • If you buy a share in authorized capital.
  • If you buy a separate unit of immovable property.
  • If you buy a company or a ready-made business.
  • If you give a loan to a company and want to check its paying capacity.
  • If you act as a guarantor for debtor in a transaction.
  • If you conclude a collaboration agreement or choose other form of business collaboration.
  • If you participate in merge or accession of legal entities in order to strengthen market positions.

Stages of Due diligence procedure:

  1. We check any attachments of property, pledges or credit commitments for the investment project. 
  2. We analyze financial, tax and accounting reports.
  3. We examine legal capacity of the seller concerning immovable and movable property offered for sale.
  4. We examine accounts payable and accounts receivable of the object of investment.
  5. We analyze job relationships. 
  6. We analyze contractual relations with third parties and contractors. 


  • be sure that the owner of the investment object provides accurate and statutorily compliant information;
  • minimize risks of loss of investment money in case of poor financial condition of the object, unfair acts of chief executives and owners, claims of contractors and controlling bodies etc.;
  • exclude default risk and risk of cost loading caused by unsuccessful investments.

Case studies of Due Diligence procedure:

A legal entity decided to acquire 70% share in authorized capital of OJSC X.

Authorized capital of the company is 10,000 roubles. However, the seller estimated its amount in several millions of roubles with a notional value of 7,000 roubles. due to high financial potential of the company, high amount of assets in form of immovable property and multi-million accounts receivable.

In order to support this statement, the seller presented balance sheets for the last reporting date and the documents for the right of ownership for the buildings.

One would think that the company is attractive for equity acquisition for potential investors. 

However, an investor (equity acquirer) ordered Due Diligence service in a law firm in order to analyze actual state of things in the company.  

As a result, specialists found out that the part of accounts receivable was overdue (with expired limitation of action period) and other part was not collectible as the debts were annulled.  

In the course of analysis, it was also discovered that part of the immovable property was encumbered and pledged under the supply agreement.

Information received during Due Diligence procedure can help a potential investor to cut the initial cost of shares.