Guide: Due Diligence for Aussie Firms Seeking Investment

Investment is an exciting opportunity for Australian companies, and yet, it goes hand in hand with the due diligence process. This vital step towards investment readiness can at times feel overwhelming, but it doesn't have to be. 

In this article, we explore the intricacies of due diligence,  from what it actually is, to what Aussie firms need to prepare for when diving into the process.  

We'll cover:

• What is due diligence (in the context of investment)?
• What is the purpose of due diligence? 
• What are the stages of due diligence?
• What are the due diligence requirements for Australian companies?
• Due diligence checklist 
• Common challenges Australian companies face during due diligence 
• How to prepare for due diligence 

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What is due diligence (in the context of investment)?

In investment terms, due diligence is a systematic process of reviewing, evaluating, and understanding the intricacies of a business, to assess its viability for investment. For Australian companies, this typically encompasses a detailed review of past and projected financial records, the competitive landscape, regulatory environment, intellectual property, corporate structure and evaluating any existing or potential legal liabilities. 

For investors, the due diligence process facilitates more informed decision-making when it comes to actually making the investment. 

Companies can ease  the due diligence process by maintaining good record keeping practices and regularly reviewing their internal documents to root out issues within the business and removing what otherwise would be roadblocks. 

The due diligence process is usually conducted with an experienced corporate lawyer, who is on hand to guide the company in preparing for its materials and spotting issues before they crop up.

What is the purpose of due diligence?

Primarily, due diligence acts as a mechanism for investors to verify the value of a company and its compliance with both industry-specific and overall governance standards. Put simply, by conducting due diligence, you can ensure that your potential investment is not shrouded in financial or operational ambiguity. 

This process goes beyond merely identifying red flags. It’s also about uncovering hidden opportunities that could be used post-investment. Whether these are financial incentives, operational efficiencies, or simply strategic advantages, the insights gained can significantly impact the direction and success of investment negotiations. 

What are the stages of due diligence?

The due diligence process, while complex, can be broken down into a few key stages. 

• Information availability: The process normally starts with the gathering of essential documents and data. You'll want to ensure the necessary materials, such as financial statements, legal contracts, and operational records, are organized and easily accessed. 
• Material Review and Clarification: Once information is available, the investor will begin conducting a thorough review. They will scrutinize documents, identify discrepancies, and seek clarification where needed. 
• Negotiations: After reviewing the material or sometimes concurrently with the due diligence, the investor and the company will engage in discussions and negotiations, collaborate with key stakeholders, address concerns upfront, and align on terms.Be mindful to explore all opportunities. Communication is key here - so work closely with your lawyer to understand the best approach. 

Throughout these stages, remain vigilant and adaptable. The nature of due diligence means unexpected challenges may arise, but a structured approach will help to keep things manageable. 

What are the due diligence requirements for Australian companies?

Due diligence in Australia is particularly significant, thanks to stringent standards set by regulators and the market itself.

• Primarily, the process for Australian entities involves a thorough review of several key areas. These include corporate structure, which confirms the organizational and legal framework of an entity, and financial health checks, which analyze profitability, cash flow, and capital structure. There is also an in-depth exploration into assets and real estate to verify ownership and valuations.
• Intellectual property assessments are equally vital, protecting inventions, trademarks, and copyrights critical to a company’s value. Similarly, IT systems audits consider cybersecurity robustness and data management practices. Legislative and compliance reviews further ensure adherence to local and international laws.
• Beyond these, due diligence mandates an examination of employment agreements, insurance policies, and any current or potential litigation. Tax liabilities are similarly scrutinized to unearth any past-due disputes or ongoing assessments.
• Finally, due diligence for Australian businesses often encompasses a verification of the regulatory environment and relationships with business partners. This helps identify any potential misalignments with industry regulations or partnership dynamics that could jeopardize the company's future.

Due diligence checklist

Preparing for the due diligence process? Check out the checklist below to see what you should have at the top of your mind.

• Corporate documents: Gather all founding documents, organizational charts, shareholder agreements, and official corporate registry filings.
• Financial Records: Include audited financial statements, tax returns, cash flow statements, and forecasts for the next fiscal periods.
• Assets and Liabilities: Compile detailed registers for all assets and outstanding liabilities, including real estate, coworking space licenses, equipment, and loan agreements.
• Intellectual Property: Provide patents, trademarks, copyrights, license agreements, and documentation of intellectual property ownership.
• IT Systems: Detail IT infrastructure, software assets, data protection policies, and recent cybersecurity audits.
• Employment and Labor: Gather employment contracts, workforce statistics, benefit plans, and compliance with labour laws.
• Legal and Litigation: Include records of ongoing or past lawsuits, compliance investigations, and legal opinions.
• Insurance: List all insurance policies, coverage details, claim history, and risk management procedures.
• Compliance and Regulatory: Summarize major regulatory requirements, compliance audits, and licenses required for operations.
• Tax Matters: Collect recent tax assessments, audits, disputes, and tax planning strategies.
• Stakeholder Insights: Evaluate investor compatibility with your business stage and sector, including their recent investment activities.

Common challenges Australian companies face during due diligence

The due diligence process can have its challenges.

Due diligence often happens on a tight schedule. You might be wanting to push to close the deal quickly, but if your documents aren’t in order, then your internal team will be scrambling to collate documents, respond to information requests and resolve queries, all while maintaining day-to-day operations. Rushing increases the risk of incomplete disclosures or oversights that could delay or derail the transaction.

The due diligence process can also surface historical issues you might not have anticipated, ranging from legacy legal liabilities and tax exposures to financial misstatements or IP ownership gaps. If left unaddressed, these can undermine your valuation or result in unfavorable deal terms.

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Additional challenges specific to Australia include Environmental, Social, and Governance (ESG) reporting issues. In a 2024 survey, 71% of investors reported increased priority for ESG factors in their transactions. Despite this, some companies may encounter difficulty in accurately quantifying and reporting their impact.

Finally, assigning insufficient resources to the process is a common pitfall. It’s common to underestimate the demands of due diligence. Ensuring a team with adequate expertise and experience is vital, as overlooking critical documents can derail a successful investment. This is where an experienced legal team becomes invaluable.

How to prepare for due diligence

Preparation is key when it comes to facing the due diligence process. With that in mind, there are several steps Australian companies can take to ensure they are adequately prepared. 

Organise your documentation

Ensure all company records, including financial statements, corporate documents, and contracts, are up-to-date and well-organized. This not only demonstrates transparency but also makes finding necessary documents quicker and more efficient during the process. 

Assemble a skilled team

Be mindful to work with a team of experienced professionals who can cover all facets of the due diligence process. This should include legal advisors, accountants, and financial experts who understand the intricacies of your industry and specific due diligence requirements. 

Educate your team

Your internal team will have most if not all the knowledge needed for the due diligence. Awareness of the process and having them be involved early on can really pave the way for a smoother process.

Conduct an internal audit

Before external parties begin their review, conduct a thorough internal audit of your operations and financial health. Identifying and addressing any issues beforehand can greatly prevent delays.

Plan for queries and concerns

Prepare for the Q&A component by anticipating potential investor queries and concerns. It can help here to create a database of prepared responses, so your team is consistent and well-informed when addressing questions. 

Conclusion

Successfully navigating the due diligence process can - and will - substantially enhance your investment outcomes.

With thorough preparation and attention to due diligence nuances, you can negotiate better terms, manage potential risks, and ultimately secure the investment needed to propel your company forward. 

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