Due diligence is a process of thorough and objective examination that is undertaken before entering into major transactions such as mergers and acquisitions, issuing new stock or other securities, project finance, securitization etc.
One of the key objectives of due diligence is to minimize, to the maximum extent practicable, the possibility of existence of unknown liabilities or risks. The exercise is multi-dimensional and involves investigation into the business, financial, accounting, tax, legal matters, compliance’s apart from reviewing policies, internal controls.
Due diligence refers to the in-depth research and analysis of a business or an individual should undertake before entering into an agreement with another party. The agreement could be a business partnership, investment or a bank loan. Due diligence allows you to understand the value of another party and if there are any potential issues. You should obtain all the necessary information to make sure that the deal is good rather than a costly mistake.
To assess the target company’s assets, capabilities and financial performance there are more than 20 angles of due diligence, but below we have considered some of the main types:
This is one of the most important types of Due Diligence. It helps to verify whether the financial status showcased in the CIM (Confidentiality Information Memorandum) is accurate or not. It gives a thorough understanding of all the company’s financial whereabouts that includes last three-year financial statements, company’s projections, recent unaudited financial statements, debtors, creditors, schedule of inventory, capital expenditure plan, etc.
This process also involves analysis of fixed and variable cost, profit margin, Major customer accounts and comprehensive investigation of internal control procedures. To receive more accurate projections Financial Due Diligence additionally examines the company’s sales pipeline and order book.
In this type of due diligence, you will get the complete report of the detailed schedule of fixed assets and their location. If possible physical varication of the location is also performed. Verification also includes an in-depth report of sales and purchases of capital equipment, all lease agreements of the equipment, title policies, mortgages, real estate deeds and used permits.
Human resources DD is very extensive and includes the following
The Tax DD include verification of the following:
This due diligence provides an in-depth review of all the tax liabilities the company has not yet paid. It also includes proper calculation of the taxes with no intention of under-reporting. Additionally, you get the opportunity to verify any pending tax-related cases with the tax authorities.
We have listed above some of the important types of due diligence. Other types of due diligence include research on the environmental, legal, customer, sales, IT network and many more. It’s very important to thoroughly conduct due diligence. As complete knowledge about the target company will allow you to make informed decisions on acquisitions and merger.