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Due Diligence

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.

We undertake financial, secretarial and statutory due diligence.

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:

Due Diligence Services

  • Administrative Due Diligence

Financial Due Diligence

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.

Asset Due Diligence

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 Due Diligence

Human resources DD is very extensive and includes the following

  • It provides the analysis of a total number of employees, current vacancies, employees serving the notice period and people due for retirement.
  • It includes an examination of current salaries, years of service and bonuses offered in the last three years.
  • You also get the details about the non-disclosed employee contracts, non-competition and non-solicitation agreements between the employee and the target company. Clarification of few irregularities in contracts.
  • HR policies are also reviewed (it includes sick leave, annual leave and other leaves)
  • Complete analysis of employee problems like harassment, illegal termination, discrimination, any pending legal issue with the former or current employees.
  • Description of employees’ health benefits, and welfare insurance policies.
  • Schedule of Grants and ESOPs

Taxes Due Diligence

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.

  • All tax returns- that includes income tax, sales tax, withholding of the past 3-5 years.
  • Past or pending tax audits of the business
  • Documents related to any unused credits, and NOL (net operating loss)
  • Any out-of-the ordinary and important correspondence with tax agencies.

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.

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