Due Diligence Report: An Overview
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
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.
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
- Certificate of incorporation
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.