Due Diligence Report: An Overview
Before entering into any transaction such as bank loan funding, business sale, private equity investment, or other deals, investors usually conduct due diligence on the company to ensure consistent compliance with all relevant laws and business procedures.
During the due diligence process, the company’s compliance, financial, and legal aspects are thoroughly assessed and documented. This evaluation of relevant business or contract facts is typically conducted before the formal contract is signed by both parties. Due diligence is not limited to the buyer; the seller can also conduct it. The due diligence process includes factual, background, legal, and accounting checks. It is advisable to conduct due diligence on the company to avoid any unpleasant surprises after the sale is completed.
Types of Due Diligence
Due diligence can be divided into three distinct categories.
Commercial Diligence
It evaluates the investment’s caliber, its potential for commercial success, and the individuals associated with it.
Legal Matters Diligence
It evaluates the regulatory challenges and legal consequences of both internal and external corporate transactions.
Finances Diligence
It validates the company’s operational, financial, and commercial assumptions. This process involves a comprehensive review of the target company’s internal controls, auditing procedures, accounting principles, and tax compliance.
Reasons for Due Diligence Analysis
- To verify and validate the information and details provided throughout the investment or transaction process.
- To detect any potential weaknesses in the investment, contract, or transaction opportunity and prevent involvement in fraudulent business practices or unethical operations.
- To collect all the necessary facts and details needed for analyzing the deal.
- Ensuring conformity with the investment or transaction prerequisites in relation to the investment or deal opportunity.
What Elements of a Due Diligence Report of a Company Are Crucial?
Some vital elements included in a company’s due diligence report are:
Financial Element: To understand the target company’s overall situation, the company’s due diligence report should concentrate on specific ratio analysis and critical financial details.
Sustainability: To ascertain the target company’s sustainability, it is essential to thoroughly scrutinize its business and financial strategies.
Employee Factors: The report must comprise a comprehensive assessment of the competency and dependability of the company’s management.
Environmental Factors: No organization can function in isolation from its surroundings. It is imperative to investigate the environment and its overall impact on the organization in question.
Essential Element: The due diligence process involves assessing the technology accessible to the organization at any given moment. Such an evaluation would significantly aid in determining the next course of action.
What Procedures Does a Corporation Follow Throughout Its Due Diligence?
A company’s due diligence procedure consists of the following steps:
Evaluation of MCA Documents
The beginning of a company’s due diligence process takes place at the Ministry of Corporate Affairs (MCA), where the public can access the company’s master information on the Ministry’s website. Additionally, all documents submitted to the MCA can also be accessed by anyone.
Register of Companies for a Lesser Fee
Typically, the information available on the MCA website is the first point of verification. The data and paperwork acquired during this stage comprise of.
- Organizational data
- Company incorporation details
- Authorized funds information
- Paid-up capital information
- Date of the most recent annual general meeting
- Date of the most recent balance sheet
- Business situation/status
- Director details
- Information on the company’s directors
- Dates of directors’ appointments
- Details on registered charges
- Information on the company’s secured lenders
- Number of secured loans
- Documents related to the company’s incorporation certificate
Association Bylaws
Furthermore, aside from the previously mentioned information, the company’s financial data and other relevant filings with the MCA can also be retrieved and scrutinized. By reviewing the MCA records, the person conducting the due diligence can gain a comprehensive understanding of the company’s operations.
Evaluation of the Articles of Association (AoA)
Performing a Due Diligence Analysis on a company’s Articles of Association (AoA) is crucial in the due diligence process as it helps to determine the different types of equity shares and their respective voting rights. The AoA of a company may also include provisions that restrict the transfer of shares. Hence, it is imperative to conduct a meticulous review of the AoA to ensure a well-informed decision is made regarding the share transfer process.
Evaluation of the Company’s Statutory Registers
According to the Companies Act of 2013, private limited companies are required to maintain various statutory registers that include details on share transfers, share allotments, board meetings, and the board of directors. It is therefore essential to examine a company’s statutory registers to obtain and validate information on directorship and shareholding.
Evaluation of the Financial Statements and the Book of Accounts
In compliance with the Companies Act of 2013, companies are required to maintain comprehensive transaction records and a book of accounts. The financial statements of the company should be cross-checked against audited and validated information on particular financial transactions. Therefore, while preparing a due diligence report of a company, the following matters must be taken into account:
- Reviewing the bank statements for precision.
- Evaluating and validating all assets and liabilities.
- Validation of the cash flow information.
- Cross-checking the precision of all financial statements against transactional data.
Evaluation of Taxation Issues
In the process of due diligence, it is crucial to meticulously assess the taxation-related aspects of a company. This is to ensure that the company does not face any unforeseen tax liabilities in the future. The due diligence report must scrutinize the following factors concerning the company’s tax status.
- Filing the income tax return
- Total amount of income tax paid so far
- Computing the company’s income tax liability
- Submission of ESI/PF returns
- ESI/PF contributions made
- Calculation of PPF (Public Provident Fund)
- Submission of returns for VAT, GST, and service tax
- Payments made for VAT, GST, and service tax
- Establishing the basis for computing payments for GST, service tax, and VAT
- Filing TDS (Tax Deducted at Source) returns
- Payment of TDS
- TDS computation.
Evaluation of Legal Aspects
To ensure that there are no outstanding legal matters or unresolved disputes, a qualified legal expert must perform a comprehensive legal audit of the company, including an assessment of any ongoing lawsuits involving the business, as well as a review of the entire real estate portfolio of the company.
- The sale of the business has not been objected to by any secured creditor.
- The court filings and, if applicable, court documents, need to be verified.
- Assessment of operational components
While undergoing the process, it is essential to gain a comprehensive understanding of the business operations, its model, and operational data. A meticulous examination of all operational elements, such as on-site inspections and employee interviews, is critical. The evaluation of operational aspects should cover and document the following points.
- Corporate strategy
- Workforce size
- Client base
- Production specifications
- Vendor information
- Machinery specifications
- Utility details
Advantages for Conducting Due Diligence Processs
Capitalisation
Assists in evaluating the size and volatility of the company’s market, both of which necessitate comparison and analysis.
Industries and Business Rivals
To comprehend the target company, it is necessary to compare and research the boundaries of its competitors.
Considering Risks
It assists in acquiring knowledge about general industry risks and risks specific to a particular company, and identifies any ongoing risks. It also predicts potential unforeseen threats that may emerge in the near future.
Visionary
Assists in evaluating the prospective company’s long-term vision and financial outlook.
Checklist for Due Diligence of a Company
- An overview of general records and business strategies
- Details on business ownership and structure
- Information on regulatory compliance
- Administration, accounting, and financial information
- Discussion of tax strategies for business goals
- Examination of legal matters.
Importance of Due Diligence Report of a Company
Mergers and Acquisitions
Both the dealer and the client undertake due diligence. The seller evaluates the buyer’s background, financial capacity to finalize the transaction, and reliability in fulfilling obligations. Meanwhile, the buyer examines the seller’s financial records, legal disputes, patents, and other critical details.
Due diligence is conducted for essential partnerships such as alliances, connections, business mergers, and other similar collaborations.
When a corporation forms a partnership with another, there are concerns regarding the dependability of the merged organization, assuming that the other company’s standpoint includes an assessment of their own resources’ sufficiency.
FAQs on Get a Due Diligence Report Online
1. What is the impact of due diligence on the financial standing of a company?
Due diligence is a crucial process for businesses and investors to gain a comprehensive understanding of the key aspects, associated risks, and suitability of a potential deal for their portfolios. It involves conducting thorough research and analysis, essentially acting as “homework” on the proposed transaction, enabling informed and wise financial decision-making.
2. How long does the due diligence process typically last?
Typically, the standard duration of the due diligence process ranges from 30 to 90 days, although in some complex cases, it can extend beyond this timeframe. Certain contingency items within this period may have specific time limits that are established by state laws or mutually agreed upon by the parties involved.
3.Who is responsible for conducting financial due diligence?
Accounting and financial experts, such as consultants, investment bankers, or auditors, usually conduct financial due diligence.
