Due Diligence Report: An Overview
Table of Contents
Due diligence is a standard procedure that investors undertake to ensure that a company consistently adheres to applicable laws and business procedures. This process is typically carried out prior to bank loan funding, business sales, private equity investments, or other transactions. The due diligence process involves examining and documenting the company’s compliance, financial, and legal elements. It is a crucial step in evaluating all relevant facts before a formal contract is signed by both parties. It is not limited to buyers only, as sellers can also conduct due diligence. This process includes factual, background, legal, and accounting checks. It is important to perform due diligence on a company to avoid any unpleasant surprises after a sale is closed.
Types of Due Diligence
When it comes to due diligence, there are three different types
Commercial Diligence
It assesses the caliber of an investment, its potential for commercial success, and the individuals associated with it.
Legal Matters Diligence
It evaluates the challenges posed by regulations and legal consequences related to transactions within and between corporations.
Finances Diligence
This process reinforces the company’s operational, financial, and commercial assumptions. It also involves a comprehensive review of the target company’s internal controls, audit procedures, accounting standards, and tax compliance.
Reasons for Due Diligence Analysis
- To scrutinize and validate the information and details provided throughout the investment or transaction process.
- To detect any possible shortcomings in the investment, contract, or transaction opportunity, in order to refrain from engaging in deceitful business practices or unethical operations.
- To collect all the necessary information and details needed to analyze the transaction.
- Ensuring that the investment or transaction requirements align with the investment or deal opportunity.
What Elements of a Due Diligence Report of a Company Are Crucial?
The following are some crucial components of a due diligence report of a company:
Aspect of Finance: To understand the target company’s overall situation, the due diligence report should concentrate on conducting a specific ratio analysis and examining crucial financial data.
Feasibility: Careful scrutiny of a company’s business and financial strategies is crucial in assessing its viability.
Human Resource Factors: The report must encompass a comprehensive assessment of the proficiency and dependability of the company’s leadership.
Environmental Factors: It is essential to study the environment and its impact on the organization under consideration since no company can function independently of its surroundings.
Essential Element: Assessing the technology available to the organization at any given time is a crucial aspect of the due diligence process. Such an evaluation would greatly aid in making informed decisions about the next steps.
Debts and Obligations: The due diligence report of a company should include an assessment of its present and potential debts and obligations, including but not limited to legal disputes, regulatory issues, and other liabilities that the company may face.
What Procedures Does a Corporation Follow Throughout Its Due Diligence?
The due diligence procedure of a company consists of the following steps:
Evaluation of MCA Documents
The due diligence process of a company commences at the Ministry of Corporate Affairs (MCA), where the master information of the company is accessible to the public through the MCA website.
Register of Companies for a Lesser Fee
Typically, the information retrieved from the MCA website is the first to be verified. The documents and data obtained in this stage include:
- Corporate Information:
- Date of company formation
- Authorized capital
- Paid-up capital
- Date of the latest annual general meeting
- Date of the most recent balance sheet
- Business status
- Director Information:
- List of company directors
- Dates of director appointments
- Registered Charges:
- Details of the company’s secured creditors
- Number of secured loans
- Documentation:
- Certificate of incorporation
Association Bylaws
Apart from the aforementioned information, the company’s financial data and other MCA filings related to different aspects of the company can be downloaded and scrutinized. A thorough review of the company’s MCA records would provide the person conducting due diligence with a comprehensive understanding of the business.
Evaluation of the Articles of Association (AoA)
During the due diligence process, it is crucial to analyze a company’s Articles of Association (AoA) to identify the different categories of equity shares and their corresponding voting rights. The AoA may contain provisions that restrict the transfer of shares, making it necessary to thoroughly review it before proceeding with any share transfer procedure.
Evaluation of the Company’s Statutory Registers
Private limited companies are required to maintain several statutory registers related to various aspects such as share allotments, share transfers, board meetings, board of directors, etc. This is mandated by the Companies Act of 2013. It is crucial to review these registers in order to gather and authenticate information pertaining to directorship and shareholding.
Evaluation of the Financial Statements and the Book of Accounts
According to the Companies Act of 2013, companies are required to maintain comprehensive transaction records and a book of accounts. The financial statements of the company must be cross-checked against audited and validated information on specific financial transactions. When preparing a due diligence report for a company, the following aspects should be taken into account:
- Reviewing the bank statements to ensure precision.
- Verifying and evaluating all the assets and liabilities
- Confirming the accuracy of cash flow information
- Verification of the accuracy of transactional data by comparing it with all financial statements.
Evaluation of Taxation Issues
To avoid any unforeseen tax liabilities against the company in the future, it is crucial to meticulously scrutinize a company’s taxation-related factors during the due diligence process. The following aspects of a company’s tax situation should be reviewed while preparing the due diligence report:
- Verification of income tax returns
- Confirmation of income tax payments made to date
- Computation of the company’s income tax liabilities
- Verification of ESI/PF returns filed
- Confirmation of ESI/PF contributions made
- Computation of Provident Fund (PPF) contributions
- Examination of submitted VAT, GST, and service tax returns
- Confirmation of payments made for VAT, service tax, and GST
- Verification of the basis for calculating VAT, service tax, and GST payments
- Examination of TDS (Tax Deducted at Source) returns
- Confirmation of TDS payments made
- Computation of TDS liabilities.
Evaluation of Legal Aspects
A comprehensive legal review of the company must be conducted by a qualified legal professional to identify any ongoing or unresolved legal proceedings, lawsuits filed against or by the company, and examination of the company’s entire real estate portfolio.
- The sale of the business has not been contested by any secured creditor.
- Verifying court filings and any associated documents, if applicable.
- Rewritten: Assessment of operational components
Throughout the due diligence process, it is essential to gain a comprehensive understanding of the company’s business operations, model, and operational data. This requires a thorough review of all operational components, including on-site visits and employee interviews. The following items should be addressed and documented during the review of the operational aspects:
- Business strategy and planning
- Employee count and details
- Client base and contracts
- Production process and details
- Vendor and supplier details
- Machinery and equipment inventory and details
- Utilities and facilities details
Advantages for Conducting Due Diligence Processs
Capitalisation
To determine the size and volatility of the company’s market, it is essential to conduct a comparative analysis.
Industries and Business Rivals
To gain a comprehensive understanding of the target company, it is important to analyze and compare its competitors’ boundaries.
Considering Risks
Conducting a risk assessment helps to identify and analyze general industry risks as well as risks that are specific to the company. It also helps to determine whether there are any persistent risks. Furthermore, it enables the anticipation of any potential unforeseen threats that may arise in the near future.
Visionary
It assists in evaluating the target company’s long-term goals and financial outlook.
Checklist for Due Diligence of a Company
- General business records and strategy overview
- Ownership and management structure
- Compliance and regulatory matters
- Information on financial management and accounting
- Examination of the company’s tax planning
- Review of any relevant legal issues.
Importance of Due Diligence Report of a Company
Mergers and Acquisitions
Due diligence is a two-way process that involves both the buyer and the seller. The seller assesses the buyer’s expertise, financial resources to complete the transaction, and ability to honor agreements. On the other hand, the buyer investigates the target company’s financial statements, legal issues, patents, and other relevant information.
Due diligence is conducted for essential collaborations, relationships, business consolidations, and other similar partnerships.
FAQs on Get a Due Diligence Report Online
1.What are the key components of due diligence?
Ownership and organization, assets and operations, financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources are among the fundamental components of due diligence.
2.What sets due diligence apart from accounting due diligence?
While accounting due diligence primarily involves scrutinizing the balance sheets, the key distinction between it and due diligence lies in the fact that due diligence entails evaluating the quality of earnings.
3.How long does the due diligence process typically last?
Typically, the due diligence process lasts anywhere from 30 to 90 days, but for complex situations, it could take much longer. Within this timeframe, state laws or parties involved may set deadlines for specific contingency items.
