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Due diligence

Due Diligence is an investigation process for into the financial and legal aspects of the business conducted in order to minimize the risks such as hidden uncovered liability, poor growth prospects, price claimed, for the prospect investment.

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Introduction

It’s an investigation process for providing the desired comfort level about the potential investment and minimizes the risks such as hidden uncovered liability, poor growth prospects, price claimed, for the prospect investment being on the higher side, etc. It’s also ensuring that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

In short due diligence is a SWOT analysis of an investment that is essentially required to make an informed decision about a potential investment.

Objective of due diligence

➲ Collection of material information form target company

➲ Conducting a SWOT analysis to identify the strength and to uncover threats and weaknesses.

➲ Provide bargaining power as per SWOT analysis

➲ Helps in taking an investment decision

➲ Helps in identifying areas were representations and warranties are required.

➲ It provides complete and accurate disclosure

Types of due diligence

➲ Business due diligence

It involves looking at the quality of parties to a transactional, business prospect, and quality of investment. This diligence includes:

  1. Operational diligence
  2. Strategic diligence
  3. Technical diligence
  4. Environmental diligence
  5. HR diligence
  6. Information security diligence
  7. Ethical diligence

➲ Legal due diligence

This diligence process covers the legal aspect of a business transaction, liabilities of the target company, potential legal pitfalls, and other related issues. It covers intra-corporate and intra-corporate transactions.

➲ Financial due diligence

It includes a review of accounting policies, a review of internal audit procedures, quality, and sustainability of earnings and cash flow, condition and value of assets, potential liabilities, tax implications of deal structures, the examination of information systems to establish the reliability of financial information, internal control systems, etc.

Benefits of Due diligence

 

➲ It protects the interests of the Company by providing objective and reliable information on the target company before making any written commitments

➲ It ensures that there are no onerous contracts or other agreements that could affect the acquirer's return on investment

➲ It confirms that the nature and genuineness of a business, Identify defects/weakness in the target company and to avoid a bad business transaction

➲ It ensures that there are no onerous contracts or other agreements that could affect the acquirer's return on investment.

➲ It helps to provide bargaining power

➲ It ensures that the target company is fully complied

 

Steps for due diligence

Pre diligence

➲ Signing the letter of intent and Non Disclosure Agreement 

➲ Receipt of documents from the company

➲ Issue identification

➲ Creation of data room

Diligence

The professionals send a report after the diligence is done, which is generally referred to as the DD report. These reports may be of various kinds, a summary report; a comprehensive report, or the like; and in so far as the deal is concerned, the findings reported in the report can be very important.

Post diligence

Often post-diligence results in the rectification of non-compliances that were found during due diligence. Interesting assignments may result from the diligence performed by the professional team. This can vary from making applications/filing requests for the compounding of various offenses or negotiating the shareholder agreement.

Documents to be checked in due diligence process

➲ Basic information

➲ Financial data

➲ Business agreement

➲ IPR detail

➲ Litigation aspect

➲ Marketing information

➲ Taxation aspect

➲ Cultural aspect

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