Technical Due Diligence
In recent years growing importance of real estate transactions is a main trend on the market. Real estate transactions have extremely high capitalization (price of the object) and a wide range of risks, each of which can lead to massive losses for investors.
Therefore, before implementation of any transaction or project connected with real estate it is advisable to carry out a detailed research – Due Diligence, aimed at identification and elimination of all possible shortcomings of legal, financial and economic nature.
Due Diligence of real estate objects also allows to increase significantly the market value of the investment after completion of the deal, compared to the acquisition costs of the investor.
Technical Due Diligence includes:
- examination of the technical base and production capabilities of the company (real estate);
- identification of strengths and weaknesses of business, its risks and ways for efficiency increase;
- determination of the potential investor’s expenses of at the pre-investment stages, additional investment associated with an object after its acquisition.
Due Diligence will be useful to:
- strategic investor for final decision-making on the investment
- commercial bank for understanding the object of investment and financial solvency of potential borrower
- acquiring company for evaluation of the acquired object. Using results of Due Diligence it will be able to determine the transaction’s risks and the acquiring cost; if necessary, we will carry out a set of additional procedures for obtaining complete information about the investment object, its market position
- the company itself. The company conducting Due Diligence for itself is the company working for the future, and the fact itself is a good sign for potential investors, they will understand that for the company’s management clear and open information about the activities of the company is of great importance and it is ready to open dialogue with partners
Prior to making investment decision the professional investor using Due Diligence shall:
- receive accurate information about the validity of the necessary documents, including their compliance with current legislation;
- confirm or refute the assumptions incorporated in the business plan;
- receive confirmation of the fact, that the investment object is really what it seems;
- obtain information on any problems of the investment object in order to avoid any mistakes in the future transaction;
- get necessary information that will allow to assess the situation and assist during the negotiation process and finalization of the transaction, as well as to check the compliance of the investment object with the investor’s criteria.
DD procedures can be ordered by the buyer (Acquirer’s DD) and the seller (Vendor’s DD) providing benefits to both.
Acquirer shall receive information on important areas of the proposed transaction (deal). DD procedure not only identifies potential risk areas, that require further research, but also the potential benefits of the proposed transaction. In the case where the price between the parties has not been agreed before the DD procedure, the main task of DD shall be the determination of the bid price, along with other important (significant) terms of the deal. On the other hand, if the price was agreed before the DD, this procedure can be used as a means of attempting to change the agreed price.
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