When it comes to critical business transactions like investing or buying property in Kenya, due diligence plays a crucial role in ensuring that risks are mitigated and informed decisions are made. However, one question that often arises is, “How much does due diligence cost in Kenya?”
Before diving into this crucial process, it’s essential to understand the associated costs to plan better.
While this question can’t be answered in one sentence, and the answer varies depending on the situation, here is what you should know.
Typically, due diligence in Kenya costs between 1% and 3% of the property, or transaction value. This fee is negotiable and varies widely depending on the situation and the law firm providing you the service.
As a rule of thumb, the lower the property value, the higher the percentage, and vice versa.
Other significant considerations are:
- The location.
- The number of services you would like.
- The experience of the firm.
- Their private billing policy.
In this article, we will explore the intricacies of due diligence costs in Kenya, shedding light on various factors that influence the charges, the types of expenses involved, and strategies for managing these costs effectively.
Understanding Due Diligence
Before we delve into the costs, let’s understand what due diligence entails.
Due diligence refers to the thorough investigation and analysis of a company or a business opportunity before making a significant investment or entering into a transaction.
It involves examining legal, financial, commercial, and operational aspects to identify potential risks, liabilities, and opportunities.
Where Can You Get Due Diligence Services in Kenya
Due diligence is a complex process that may not make monetary sense to undertake yourself, so most businesses and individuals rely on professional due diligence service providers in Kenya.
Due diligence is a service provided by many law firms in Kenya, including Kraido Advocates.
Other due diligence providers are accounting and management consulting firms.
We recommend working with law firms because it is easier for us to get data concerning ongoing legal disputes, interpret legal documents, and forecast possible breaches of the law.
We also have an indemnity cover and a client account, allowing us to provide escrow in transactions while keeping our clients safe and confident and their funds secure.
Factors That Determine The Cost Of Due Diligence
The cost of due diligence varies significantly from one transaction to another. The following are some factors to consider before seeking due diligence services.
1. Scope and Complexity of the Transaction
The nature and complexity of the transaction are significant due diligence cost determinants. For instance, due diligence for mergers and acquisitions may involve more extensive investigations than investments or joint ventures.
Think of a case where a smaller bank becomes part of a larger bank through a bank acquisition process, and the larger bank takes over its operations, assets, and liabilities, integrating it into its organization.
Similarly, in everyday transactions, a comprehensive examination covering legal, financial, operational, and environmental aspects incurs higher expenses than a more focused evaluation.
2. Time Constraints
Urgency and tight deadlines or accelerated timelines can significantly inflate the cost of scrutiny and investigation.
When your lawyer has a shorter timeframe, they may need to allocate additional resources, work overtime, or fasten the research process.
Therefore, we recommend that you plan ahead of time and engage your lawyer on time.
If you don’t have a lawyer, consider contacting us for your due diligence and other legal services.
3. Target Company’s Size
The size of the target company also impacts costs. Small and medium-sized enterprises (SMEs) may have fewer resources and limited documentation, making the due diligence process less complex. On the other hand, giant corporations and multinational companies may require more extensive investigations, increasing the costs involved.
4. Geographic Reach
The geographic scope can raise the due diligence cost if the target company operates in multiple regions and has international subsidiaries.
The cost will increase due to various factors, including travel and accommodation expenses and operating in higher-priced markets.
5. Expertise and Professional Services
These don’t necessarily relate to the search but refer to the extra services you’ll buy during the process.
These can include legal consultations and accounting or escrow services.
6. Industry and Business Sector
Different industries influence the costs in different ways. Business sectors with greater technological complexity and encompass various intricate elements, such as finance and technology sectors, generally entail higher costs for conducting due diligence.
7. Information availability
The target company’s availability and quality of information can also influence costs.
The process may be smoother and more cost-efficient if the company has well-organized records and readily shares information. However, a lack of cooperation or incomplete documentation may require additional efforts and resources, increasing the cost or raising red flags that can lead you to abort the transaction.
Costs Involved in Due Diligence
Let’s explore the expenses typically incurred during the due diligence process to understand the cost breakdown.
Here is a breakdown of potential costs that will make up your lawyer’s fee note:
- Professional Fees
- Research and Information Gathering
- Travel and Accommodation expenses
- Legal and Compliance Documentation
1. Professional Fees
Professional fees are the primary component of due diligence costs.
These fees include charges from legal, accounting, and management consulting firms.
These fees vary based on the experience and reputation of the professionals involved, the complexity of the investigation, and the time required to complete the process.
Expect hourly rates or fixed fees, depending on the scope of work.
We recommend engaging professionals with expertise in due diligence to ensure a thorough investigation and analysis that safeguards your investment.
2. Research and Information Gathering Costs
Comprehensive due diligence requires access to various sources of information, including public records, industry databases, and proprietary data.
The information gathering encompasses document retrieval, review, background checks, and investigations.
For example, it costs 500 500 Kenyan shillings (approximately $3.50) to search for land ownership details on the government’s land registry site.
In the case of companies and businesses, we analyze financial statements, public records, government records, and legal agreements.
Our due diligence team also conducts background checks to verify regulatory compliance like Environmental and Labor Laws.
3. Travel and Accommodation Expenses
If the due diligence involves traveling to the target company’s country or city, travel and disbursement expenses like meals and living expenses may apply.
4. Legal and Compliance Documentation
Due diligence often involves extensive legal and compliance documentation review. Costs may arise from legal consultations, document drafting, and ensuring compliance with Kenya’s laws and regulations.
Frequently Asked Questions (FAQs)
How much does due diligence cost in Kenya
The average cost of due diligence in Kenya ranges from 1% to 3% of the transaction value, but it varies based on factors like transaction nature, complexity, seller size and industry, and investigation scope.
How long does a due diligence process usually take?
Due diligence can take anywhere from a week to months since it depends on various factors, including the complexity of the transaction and the availability and quality of the information provided. The key is involving professionals and exercising patience to safeguard your investments.
Can I conduct due diligence without professional assistance?
Yes, you can carry out due diligence yourself, but it will be a tedious and costly experience, plus you are likely to miss details that can be costly. Doing it yourself for critical transactions is not a very good idea.
What are the risks of not conducting due diligence?
Failing to conduct due diligence can lead to financial loss and legal issues that can lead to losing property.
Are due diligence costs tax-deductible?
Yes, due diligence costs constitute corporate expenses and are tax deductible.
Can due diligence costs be negotiated in a transaction?
Yes, due diligence costs are not fixed and can be subject to negotiation to reach a mutually agreed-upon price within or near the average range of 1% to 3% of the transaction value is possible.
Conclusion
To sum it up, due diligence costs in Kenya can vary significantly depending on various factors like the nature of the transaction, the size of the target company, the scope of the investigation, and the quality of information available.
Due diligence is an investment in mitigating risks and ensuring informed decision-making, and understanding how we calculate fees is crucial for budgeting and effective cost management.
Also, engaging professionals like Kraido Advocates law firm guarantees safer transactions and comprehensive searches.
As always, contact us today for an accurate due diligence services price quotation and legal consultation.
