DUE DILIGENCE

Due diligence is an inspection and risk assessment of an upcoming business transaction basically; it is a

background check to make sure that the parties to the transaction have the required information they need,

to proceed with the transaction. A proper due diligence is required to reveal misrepresentation and

fraudulent dealings in a major business transaction. Due Diligence is the process by which confidential,

legal, or financial and other material information are exchanges, reviewed and appraised by the interest

parties who are going to enter into a Business transaction. Due diligence often refers to the in-depth

research and study being done before signing an agreement or a business with a party.

Objective of Due Diligence

The objective of due diligence is to identify problems within the business, particularly those matters which

may give rise to unexpected liabilities in the future. The main objectives of conducting Due Diligence are-
When Due Diligence is required?

 Mergers and Acquisitions:

Due diligence is done from the perspective of the seller, as well as the buyer. While the consumer

looks into the financials, litigation, patents, and a whole range of relevant information, the seller

concentrates on the experience of the buyer, the financial abilities to complete the transaction, and

the ability to fulfil responsibilities taken.

 Partnership:

Due diligence is done for necessary alliances, necessary connections, business combinations, and

such other alliances.

 Joint Enterprise and Collaborations:

When one company joins hands with another, the reliability of the company is a subject of

concern. Assuming the other company's stand includes the adequacy of supplies at their end.

Other than that, there are certain transactions that requires proper Due Diligence-

o Strategic Alliance

o Business Coalitions

o Outsourcing Agreement

o Technology or Product Licensing

o Joint venture through technical or financial Collaboration

o Venture Capital investment

 o Public Issue.

Types of Due Diligence

When to perform due diligence

The due diligence process is important for potential buyers to undertake when
considering purchasing a private company or entering into a partnership.
Due diligence gives buyers the opportunity to examine the records, assets and
operations of a target company in order to assess its suitability as an investment. The
goal of due diligence is to gather enough information to allow the buyer to make an
informed decision about whether or not to proceed with the business transactions.

The due diligence process can be time-consuming and complex, but it is essential in
order to make a sound investment decision. Buyers who take the time to conduct due
diligence will be in a much better position to understand the risks and opportunities
involved in a proposed purchase or partnership.

What are the types of due diligence?

There are four common types of due diligence: financial, legal, commercial and
reputational.

Financial due diligence

This is the process of investigating a company's financial performance in order to

assess its value and potential for investment. It usually involves reviewing the
company's accounting records, financial statements, tax returns and other information.

All financial aspects of the company should be outlined, including debts, profit/loss
ledgers, and the accounts of any wholly-owned subsidiary company.

A potential business partner should access a business’ latest accounts, annual returns
and company reports through Companies House.

It's also important to look at total assets, liabilities and long-term debt levels.

Financial due diligence will usually be undertaken by the buyer's accountant and/or
solicitor as part of the pre-contract investigations. They will review all aspects of the
company's financial affairs to assesses risks and liabilities, as well as its financial
health and prospects. The findings of this due diligence will be used to negotiate the
terms of the sale contract, including the price.
Legal due diligence

The legal due diligence process looks at a company's legal status and compliance with
laws and regulations. It usually involves reviewing the company's corporate filings,
contracts, and other legal documents to assess the legal risks.

It is an important due diligence step as it helps the investor or buyer to understand a

company's ability to keep running smoothly after a purchase.

All information presented in a company's annual report must be accurate, or the

individual directors may be exposed to criminal sanctions.

This is especially important for financial information, but applies to all information
included in the report. The annual report is a public document, and as such is subject
to legal scrutiny. Any inaccuracies or false statements could result in legal action
being taken against the directors of the company.

As a result, it is essential that all information included in the annual report is accurate
and up-to-date. This will help to protect the directors from any potential legal action
and ensure that the company complies with its legal obligations.

Commercial due diligence process

This explores the target business model, market position, competitive landscape and
other factors to assess its viability and potential for investment. It could involve
conducting market research and understanding the nature of the market, including
risks and potential for growth.

There are a number of commercial considerations that must be taken into account
when entering into any business transaction.

Furthermore, it is also important to have a general understanding of the target's goods

and services. This will help you to understand the market capitalisation or "market
cap" of a private company.
The target company may have intangible assets such as goodwill, brand recognition
and intellectual property assets like trademarks and patents.

Operation and structure

The term "operational" refers to all of the company's procedures, its location,
inventories, suppliers, management structure, staff levels and skills, customer relation
and specific insurance coverage.

In other words, it encompasses everything that the company does on a day-to-day

basis in order to function.

Operational details are important for a number of reasons. First and foremost, they
provide a clear picture of how the company is organised and how it goes about its
business.

This information is essential for anyone who wants to invest in or partner with the
company. It also helps to ensure that the company is run smoothly and efficiently, and
that customers are satisfied with the product or service that they receive.

Operational details can help to identify potential areas of risk and liability. By
understanding all of the moving parts of the business, companies can be better
prepared to protect themselves against legal challenges.

Reputational due diligence

This is the process of investigating a company's reputation. It usually involves

conducting media searches, social media monitoring, and interviews with past and
current employees. For example does the business have a history of employee
complaints and issues?

Due Diligence – Focused Area

Below mentioned are the key factors to be kept in mind while conducting Due Diligence-
 o Clear about the party’s expectation in terms of business revenue, profits, and the

profitability of the target company.

o To examine whether the related parties have resources to make the business

succeed. Also, whether the party are willing to put in all the hard work required
for the new venture.

o Consider whether the business gives concerned party the opportunity to put the

skills and experience to good use.

o The concerned parties must also focus on Competitors and Industries, valuation

multiples, Management and ownership, and risk factors.

Benefits of Due Diligence

Due diligence is needed so that the entity is well conscious of all the essential items like:-

 Administration and Ownership

Analysis of who runs the Company

 Capitalization

Examining how large and volatile is the Company and market. A contrastive analysis of both of

them is needed.

 Business Competitors and Industries

Research and compare the boundaries of competitors for a better comprehension of the target

Company
 Balance Sheet Review

This helps in interpreting the debt-to-equity ratio.

 Revenue, Profit and Margin Bearings

To examine if there are any recent trends in the figures which may be rising, falling or stable?

 Risks

It enables to learn industry-wide and Company-specific dangers, and all the checking if there are

any on-going risks and trying to predict any futuristic unforeseeable threats in the future.

 Capital History/Options and Probabilities

How long has the Company been dealing? For a short- term or long-term? Has there been a steady

stock price?

 Expectations

To maximize the profit for the future.