The phrase due diligence has a different meaning and is useful in different contexts.
Due diligence is mostly applicable in the concept of finances. In finances, due diligence refers to knowledge about finances, which is useful to know about sellers’ information and appraise its value.
Due diligence includes:
1. Analyzing the purpose of the project
2. Pre-analysis of the financial business event
3. Full check documents
4. Full analysis of the business event and plans
5. Risk analysis
6. Final benefiting certain and ongoing monitoring.
For example, when a customer or buyer operates with the help of online reviews, before purchasing anything is what we may call due diligence.
Importance of due diligence
Due diligence is crucial because of the following reasons:
1. Helps the customers to get aware of many things and phenomena.
2. Helps the companies to understand the deal and risks so that they are thorough with it and get an idea if they should opt for proper deals or not.
3. It’s important in legal aspects.
4. It is beneficial for both buyers and sellers.
5. Assures the purchaser that they are doing the accurate deal.
6. Also, it helps the seller to know the level of business they are stepping into.
Types of due diligence
In Financial Due Diligence, the complete business is thoroughly studied and scrutinized.
The company’s historical and current financial performance is taken care of. In this example, the company’s finances are very important to understand.
The finances must be true in every sense. The tasks in financial due diligence include reviewing financial declarations, benefits, debts, cash flow, and projections.
B. Legal Due Diligence
Legality is a part of every process, especially where finances are concerned. Hence, legal due diligence is a fragment of important transactions and is taken into proper deliberation before entering any complex deals.
C. M&A Tax Due Diligence
Taxes are a crucial part we, as responsible citizens, should pay. Thereby, tax diligence entails the scrutinization of all different taxes that can apply to the business.
D. Operational Due Diligence
This type of due diligence includes all the concerned company’s operations and considers all the operational functions and processes.
Due Diligence Checklist
Research is very important when entering into any kind of business no, matter if it’s buying or selling. It tells us if we should move with our process or not.
The given information is useful for performing due diligence with a private limited company or limited company.
• Articles of association
• Memorandum of association
• Certificate of incorporation
• Shareholding pattern
• Financial statements
• Income tax returns
• Bank statements
• Bank documents
• Utility bills
• Employee records
• Operational records
To initiate the company’s due diligence, one needs to review all the documents related to the Ministry of Current Affairs (MCA).
The company’s complete data is made public on the Ministry of Current Affairs website.
This includes company information, director information, registered charges, and other documents.
Apart from this, all the financial and bank statements of the company should be reflected wherein it is thoroughly analyzed and reviewed.
Moreover, complete information about the taxes is gathered. This includes income tax return filing, tax pay, calculation of income tax liability by the company, ESI/PF payments, TDS returns, TDS payments, and TDS calculations.
Financial due diligence includes the following:
1. Financial Management Assessment
2. Financial Analysis
3. Financial Evaluation
4. Cost estimates and financing evaluation
5. Disbursements and auditing
6. Report and recommendation of the president
Financial due diligence includes financial terms and information. This is based on the last and full and final decision of the investor.
This involves receiving financial records and anything else if deemed material.
There is a difference when it comes to audit and financial due diligence. The audit is conducted by CA, CS, or any cost accountant.
The goal of an audit is to give opinions about the financial statements that show the true and fair side.
This follows the rules, regulations, and standards of the governing body. On the contrary, financial due diligence is conducted by any professional individual who is fully experienced in M&A.
This is useful to know about the hidden risks and deal breakers in any complex investment.
There is no specific period of financial due diligence. Also, financial due diligence is useful and important to buyers, sellers, venture capitalists, investment bankers, etc.
Financial Due Diligence is of Several Types:
1. Acquirer side
2. Seller side
3. Full scale
Process of Financial Due Diligence
Step 1. Initial Assessment
Step 2. Orientation terms
Step 3. Information checklist
Step 4. Fieldwork
Step 5. Detecting issue
Step 6. Feedback from management
Step 7. Preparation of draft report
Step 8. Discussion of the draft report
Step 9. Issue of the final report
Financial due diligence is of various types: buyer, seller, and full scale. The process of financial due diligence is crucial.
In conclusion, due diligence refers to the investigation of the finances, which is useful to know about sellers’ information and appraise its value.