The ABCs of DDs JUSTINE KRIGE, director in corporate and commercial practice at Cliffe Dekker Hofmeyr (CDH), shares some legal advice for entrepreneurs
WHAT EVERY ENTREPRENEUR SHOULD KNOW 1. Due diligence investigations typically comprise a legal, financial and tax review. This is done by performing a comprehensive analysis of the target company, often including commercial, banking and finance, litigation, employment, environmental, insurance, tax, intellectual property, and real estate law aspects. The assets and liabilities of the target company and how the business functions are scrutinised. Often various legal, financial and tax teams will work in tandem. 2. How is a DD investigation undertaken? The company under investigation will typically be required to make important documentation available to the reviewers through a virtual or a physical data room. The nature of the documents and information required will have been set out in an information request. These documents depend on the specific purpose of the review, but are usually a mixture of company secretarial documents, constitutional documents, client and supplier agreements, employment agreements and human resource policies, payroll schedules, business licences, trading terms and conditions, business plans, financial statements and tax filings, among others. 3. What are reviewers looking for in a DD investigation? Generally, they are looking for any potential risks faced by the target company such as existing debt obligations in the form of unpaid tax or potential administrative fines as a result of statutory noncompliance, as well as any restrictive or unusual clauses in agreements, particularly those which trigger adverse consequences in the event of a change of control of the target company (for example, if an investor takes up a majority stake). Depending on the particular sector in which the business operates, there may be a specific focus on certain aspects of the target company’s operations (for example, an emphasis on evidence of environmental legal compliance in respect of a waste management company). 4. How is a DD investigation ultimately relevant? Ultimately, the reviewers will compile a due diligence report, which will give a full picture
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of the target company. This report will enable the investor to gauge the commercial viability and performance of the target company and make an informed decision about the investment. The report will also inform the nature and extent of the warranties and indemnities that the investor may want to include in the investment agreement so that any identified risks are adequately mitigated. The due diligence report is typically pivotal in an investor’s ultimate decision (and on what terms) to invest. 5. How can the target company assist? Statutory compliance (or noncompliance) is a key consideration. Review your basic company secretarial and other statutory records, founding documents, employment contracts and human resource policies, supplier and customer arrangements, trading Justine Krige
A due diligence investigation examines the structure and operations of the target company, its assets and liabilities, as well as any potential risks that it faces in the market. In short, are there any skeletons in the closet or risks around the corner? The scope of a due diligence investigation will vary from case to case. Generally, the more significant the investment, the more detailed and probing the due diligence investigation.
terms and conditions, business licences and tax filings. Where these do not comply with legal requirements, correct as soon as possible. Ensure that the company keeps a comprehensive paper trail, and as the business concludes key contracts, carefully consider whether they would be attractive to a potential investor. Businesses that are structured correctly from the outset and keep up-to-date records are more likely to lend themselves to investment.
RETHINKING TECHNOLOGY The current global crisis is compelling business owners to rethink the way they do business. Now more than ever, future-proofing needs to embrace new technology like proptech. By RAINA JULIES
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roptech is evolving at a rapid pace and is real estate’s biggest disruptor. Essentially, proptech allows the real estate market to explore digital innovations that make doing business more efficient, simpler and seamless. Think drone technology for virtual tours, the rise of artificial intelligence (AI) where AI platforms allow developers and investors to test feasibility and risks, cloud-based technology that provides access to data on any property from anywhere, and robotic automation that uses software or bots to streamline business operations and reduce costs. “Proptech is a powerful level of tech that’s increasingly merging the digital world with the commercial property environment,” says Wayne van der
Vent, co-founder of Quoin Online, innovation partners in the commercial property sector. “Landlords and owners need to rethink not only the method of transacting and marketing, but also what makes their property different and attractive to tenants, buyers and investors. Tech moves fast; if there was ever a time for proptech to take centre stage, it was during the lockdown.” Van der Vent explains that the office sector may, for example, “need to look at more flexible leasing arrangements, not only offering space, but also services. It may be necessary for landlords to adopt the same methodologies as shared office operators.” It’s this type of disruption and solutions-based focus that makes proptech an essential part of growing the commercial property market in crisis times.
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ost investors will want to conduct a due diligence (DD) investigation on a business before investing any funds or taking up an equity share. What does this mean for your business if you are looking for funding?
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2021/08/23 3:42 PM
