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Organisation of the due diligence process – part 4

Krzysztof WOŹNIAK
Audit Senior at RSM Poland

Providing access to documentation by the seller

Basically, the place where documents are made available by the seller to the auditor for inspection is the so-called data room. There are two ways to share information in order to carry out due diligence:

  • "Traditional" data room − it is generally a physical room (usually at the premises of the seller or the entity managing the accounts of the company which is the subject of the transaction), in which the auditor examines the documents submitted and the situation of the company which is the subject of the transaction.
  • Virtual Data Room (VDR) − the website, information platform or server to which access is limited. Access to the VDR is only provided to invited persons (usually the buyer, the seller or the entity managing the accounts of the company which is the subject of the transaction, and the auditor), and its resources include electronic versions of documents that are the subject of analysis.

The method of sharing documents should be determined by the buyer and the seller. The common denominator of both methods is to create a list of available documents and attach it to the final agreement. This allows both parties to document the information used to determine the transaction price. Moreover, this can protect both parties from possible subsequent disputes concerning non-disclosure of information.

Both a traditional data room and VDR have their advantages and disadvantages. A traditional data room is often preferred by the buyer (represented by the auditor) as it allows for direct contact with the persons responsible for individual business areas of the company. It is generally believed that a face to face interview with an employee of the company cannot be replaced by an analysis of the documents. Such contact allows you to identify more areas of risk, provide a better understanding of the company's operations and processes taking place in it, and streamlines the circulation of documents. In general, during a visit to the seller's premises, the information flow is significantly faster than the electronic exchange of information. The preparation of a list of shared documents, which will later form part of the final agreement, can be much more difficult, and the risk that it is incomplete is significantly higher.

In the case of electronic data interchange in the VDR, the seller has more control over what information is shared. The seller can grant permissions to individual documents, protect them against duplication, add watermarks and has a guarantee of confidentiality of information provided. Conducting due diligence through electronic data interchange is also associated with easier creation of the list of shared documents, and minimises logistics costs. In addition, where there are several potential buyers and each of them has its auditor, the buyer can assure each of them that they obtained exactly the same information as the others, and only on the basis of the auditor’s expertise individual investors can draw conclusions about the situation and status of the company which is the subject of the transaction.

Due Diligence Report

After this analysis, each auditor should communicate their conclusions and findings in a written report to the buyer. Such reports are not disclosed to sellers and do not constitute annexes to the final agreement. In the worst case, it may turn out that the risks identified by the auditor are significant enough that the buyer withdraws from participation in the later part of the transaction process. Very often the buyer, however, shares the auditor's insights from the analysis with the seller to negotiate a lower price of the transaction. It should be noted here that the auditor does not assume any responsibility for decisions taken by the buyer. These decisions should be taken based on the best knowledge of the buyer, obtained from the auditor's own analysis, negotiations, and any other sources that may contribute to a reliable valuation of the investment.

 

Read more:

Organisation of the due diligence process – part 3

Organisation of the due diligence process – part 2

Organisation of the due diligence process – part 1

 

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