In recent decades, the AI in M&A Due Diligence market has been on an increasing slope. Due...
The Due diligence was already into action in the mid-fifteenth century but was formally introduced in the 1930s. Due diligence in India is generally performed by a company before any business sale, private equity investment, bank loan funding, etc., During this process, the financial, legal and compliance aspects of the Company are usually reviewed and documented. It enables a person to evaluate and understand a potential acquisition, partner, or buyer and make correct decisions henceforth. The main objective of carrying out the process of Due Diligence is a manual tool to check that the business you want to purchase is financially and legally sound and stable and to get ensured that you know all the essential facts of the Company. It enables organizations to investigate and obtain as much information as possible of which diligence is performed.
The meaning of due diligence is synonym with the word investigation and research. The term, diligent means to be attentive, hardworking, and thorough. Due diligence is the necessary care performed by an individual to avoid causing harm to other persons or property. It is more of an investigative work done for evaluating the assets and liabilities, and further looks into the potential commercial as well as the economic value of the Company or firm.
Due diligence is easy to understand on the surface, but it’s a pretty complex topic and shouldn’t be overlooked.
Due diligence is all together with a different concept when compared with the auditing process. It is neither an audit nor a valuation of the target company. Due diligence does have standard procedures, and it overlaps with an inspection in purpose and method. The factor that distinguishes them is a thorough investigation that focuses specifically on crucial information that has been asserted to the buyer, often mainly via the financial statements.
Due diligence can be classified into four major categories:-
Diligence can be of any kind and can be performed by anyone a bit cautious with what he does. Like for example- when a person goes for a vacation in some hilly area or beaches, he will look into the weather/ temperature, kind of clothes required, places to visit, means of transport and any other relevant information, etc.
In business, due diligence may be practiced when a company is thinking of merging, acquiring or coming together for partnership so that they can have a better picture of the Company’s shape in which they are dealing with.
While investing in properties, the person tries to avoid any loss, all kind of research is done as to where they are spending their money. The investor must gather the necessary information so that they can overcome any potential risks.
When two parties or more are forming an agreement. Both parties must outline their expectations and understandings to fulfill the requirements of the given transaction. This outlining of clauses or aligning of opinions is, again, a form of due diligence.
In these cases, there will be an initial due diligence step where all risks are evaluated before establishing a deal with a company or person. There is always a pre-risk management analysis of the entity before any official agreements are made.
There are following types of due diligence:
Administrative Due Diligence is the aspect of due diligence that involves verifying related administrative things like facilities provided, rate of occupancy, number of people employed, etc.
It is required to keep a check at the various facilities owned or occupied by the seller and check if the finance departments capture all the operational costs.
It provides a clear picture that gives of the Buyers’ cost, which may incur if they plan to expand the target company further.
The financial due diligence strives to check whether the financials showcased in the Confidentiality Information Memorandum (CIM) are accurate or not. It targets to achieve the understanding of all the Company’s financials in toto, but it is not restricted to,
Asset due diligence generally consists of all the detailed schedule of fixed assets, their locations, physically and through documents, it consists of
Human resources due diligence is quite extensive. It includes numerous labor laws and policies. It may consist of the following:
A check on the environment is required in the present day scenario. A company is required to adhere to all the major environment-related laws. If the Company does not comply with the related laws, the local authorities have the power to penalize the Company and in turn, cease to function by their orders. Hence, environmental audits play a crucial role for each property owned or leased by the Company one of the critical types of due diligence. These following points should be evaluated:
Tax Due diligence refers to scrutinizing all the documents related to the tax liability, taxes of the Company, and to ensure their proper calculation with the available laws. In addition to this, the status of any tax-related pending cases is checked with the tax authorities.
All documents related to tax compliance, which includes verification and review of the following points:
With the current changes in the competitive business environment, Intellectual Property (IP) rights are key elements that are required to maintain competition in the market. IP is a business asset, an integral part of the business process. Almost every Company has intellectual property assets that they can use to monetize their business. These intangible assets are something that differentiates their product and service from their competitors, and may often comprise some of the Company’s most valuable assets. A few of the items that need to be looked at in a due diligence review are:
Legal, due diligence is, of course, essential and typically includes examination and review of the following elements:
This type of Due diligence includes a closer look at the target’s Company and its customer base. In this process the following points are analyzed and examined:-
There is no specific law related to this as it is more of a diligence process than compliance work. So, Very little information is available on the internet concerning this process. It’s a significant and crucial step which is required by any Company while investing and knowing the health of the Company. That also makes it even more important for entrepreneurs to get educated and try to master this part of the cycle. Checklists keep target companies informed about the next step. The process is usually curated and maintained by legal professionals who have the right amount of corporate and legal experiences.