Business Due Diligence Services
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What does due diligence mean in the context of a business?
Due Diligence is the procedure in which confidential information (which could be legal, financial, material, or any other) is exchanged, reviewed, and appraised before executing a business transaction. The Due diligence process is undertaken to analyze (and preempt) the possible risks associated with a forthcoming business transaction. The process involves a meticulous and methodological investigation of businesses, personnel, etc. and is executed with the highest care to make sure that information is precise, accurate and complete. The procedure aims to uncover any possible information that may affect the outcome of the transaction and success in the long run.
Why must a company opt for conducting due diligence:
Misrepresentations intending at fraudulent dealings may not be obvious and easy to sight. Some fraudulent companies may cover the facts up smartly, trying to mislead the other party, especially for a major business transaction. The key business transaction between the two firms has high stakes involved. A fraudulent transaction can have a major negative impact on your business. Due diligence ensures that the parties have all the essential information they need, to progress (or not) with the transaction.
The method is widely used and effective for investigating and assessing a specific business opportunity ahead of the final transaction. The process is intense and the investigation spans across all key aspects of the past, present, and predictable future of the company. Due diligence report must offer meaningful insight on aspects like risks associated with the transaction, the value at which a transaction is fair, the warranties and indemnities that must be looked at from the vendor before the agreement and more.
What all does due diligence cover?
The proper due diligence involves financial, business, internal systems, profitability, key operational aspects, management team, promoters, and other material factors essential to making an informed decision around the transaction. Due diligence protects the interests of the company by bringing to light, reliable information necessary to make return commitments. Due diligence instills the desired comfort level around the potential investment and helps minimize the risks like hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher. The process helps identify how genuine the target company is highlighting the defects/weakness in the target company if any. Due diligence in crux is a thorough analysis of investment and is required to make informed decisions.
What are the key objectives of Due Diligence:
Due diligence aims to validate the strategic attractiveness of the target company, its valuation, risk associated, and more. Most businesses opt for due diligence to:
- Gather information from and about the target company.
- Identify the strengths of the target company and at the same time uncover threats and weaknesses via SWOT analysis
- Based on thorough analysis, improve the bargaining position
- Make an informed decision around the investment.
- Identify areas that necessitate representations and warranties if the transaction goes through.
- Instill the desired comfort level in a transaction.
- Ensure a complete and accurate disclosure of facts, leaving no room for chance.
- Bridge the gap between the existing and expected terms for both parties.
- Ensure the decision is accurate and based on facts.
- Enhance the stakeholder's confidence concerning the transaction.
The SWOT analysis as part of the due diligence unearths not only the strengths and weaknesses from a financial perspective but also the tacit (intangible) perspectives.
What are the key challenges involved in conducting due diligence?
For effective due diligence, first and foremost, the potential buyer must be clear on the goals and outcomes of acquiring the target company. For example, an ongoing lawsuit could not only jeopardize the financial stability of the company but also the morale of existing customers, and employees. Lawsuits have the potential of eroding the target company’s market share and bring down the sentiment of employees. Hence, if the buyer wants access to the target company’s talent, he/she must anticipate (and address) the cultural issues ahead of time.
The process of due diligence faces one major stumbling block and that is the non- availability of information on the target company. The target company in most cases wants to keep the possible sale information confidential from its competitors, customers, and employees, hence, getting any information from any of these sources gets tricky.
If the potential buyer plans to taps new customer segments with the transaction, he/she must make sure that the target company maintains a good relationship with existing customers. Many times during the due diligence process, the target company does not want to share information on the possible sale with its existing client base.
Most times potential buyer wants to keep the target companies workforce intact, and do not want the employees of target company sense an acquisition ahead of time. The due diligence team necessarily must discuss with trusted advisors (both inside and outside the organization) to discover and brainstorm the possible scenarios and preempt challenges.
Scope of Due Diligence:
The scope of due diligence could vary based on the requirements of the specific transaction. The needs of the potential buyers, in terms of identifying key uncovered issues, areas of concern/threat, and identifying additional opportunities could all vary significantly from one case to another.
The legal, financial, and business communities/potential investors use due diligence as a means for disclosure and assimilation of public and proprietary information related to the assets and liabilities. The information furnished in the due diligence report could include the financial details, personnel reports, taxes, environmental issues, legal matters, intellectual property matters, and more.
Due diligence furbishes a thorough report on all the major obligations of the target company (like outstanding debts, rights and obligations, pending and possible lawsuits, leases, warranties, all impact laden contracts (both inter and intra company).
The due diligence related inspection typically covers:
- Compliance so far with applicable laws.
- Any regulatory violations in the past and disciplinary actions taken against the target firm.
- Existing pending litigation and assessment of the possibility of litigation in the future.
- Study the financial statements in detail, to gauge performance and unearth irregularities if any.
- Assets (physical and intellectual property, brand value, goodwill, reputation, and other intangible assets )
- Unpaid taxes if any and/or judgment.
- Past business / product failures and debt if any, as a result.
- Exaggerated credentials/fraudulent claims if any.
- Misrepresentations / character issues.
- Cross – border issues (like double taxation, foreign exchange fluctuation, sovereign risk, investment climate, cultural aspects etc.)
What are the key types of due diligence?
The due diligence process varies significantly for different types of companies. The work cuts across financial, legal, labor, tax, environment, and market/commercial aspects. Some of the other prominent areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits, immigration, and international transactions.
The most prominently done due diligence are business due diligence, legal due diligence, and the financial due diligence.
A. The Business Due Diligence involved details analysis of the following:
- Operational due diligence.
- Strategic due diligence.
- Technical due diligence.
- Environmental due diligence.
- Human Resource Due diligence.
- Information Security due diligence.
- Ethical Due Diligence.
B. The Legal Due Diligence (including Secretarial due diligence)
C. The Financial Due Diligence (including Tax due diligence)
A. Business Due Diligence:
The business due diligence aims at evaluating deeply the parties involved in the prospective transaction and how fruitful the investment can be. Business due diligence is detailed and covers much different analysis including:
- Operational due diligence: Operational due diligence aims to assess the functional operations of the target company. Due diligence looks at how seamlessly the operations are, how latest is the technology used in the operational processes, what is the operational efficiency as compared to the industry, and more. This type of diligence successfully identifies operational weakness and inadequacies in the control mechanisms.
- Strategic due diligence: The strategic due diligence aims to test (and validate) the strategic reasoning for executing the proposed transaction. The process analyses whether or not the deal is commercially viable, and validates if the targeted value is reasonable. The due diligence involves carefully evaluating value creation opportunities, competitive position, critical capabilities, and more.
- Technical Due Diligence:
The Technical due diligence encompasses two key areas:
Intellectual Property due diligence: Intellectual Property refers to Patents, Copyrights, Design, Trademarks, Brands etc. In recent times the intellectual property is gaining as much prominence as the physical assets. The key objective of intellectual property due diligence is to ascertain the nature and scope of the target company's right over the intellectual property, evaluate the validity of the IPs and make sure there are no infringement claims.
Technology due diligence: Technology due diligence considers aspects like the current level of technology adoption, the company’s existing technology landscape and investments needed in the future. We live in the digital world and operations become easier when the technology landscape of the two companies match, hence this is a key consideration during the merger and acquisitions.
- Environmental Due Diligence: Environmental due diligence evaluates the environmental risks and liabilities of the target company. A merger, acquisition, management buy – out, corporate restructure necessitate a proper environmental due diligence.The environmental due diligence aims to bring out a detailed assessment of the historic, current, and potential future environmental risks (if any) associated with the target firm’s sites and operations.
The process identifies risks related to:
a) Environmental setting and site history including conditions in which the site is operating.
b) Operations and management of sites, current state, and potential fallouts.
c) Identify whether (or not) legal compliance and pollution checks from regulatory authorities are in place.
- Human Resource Due Diligence: Human Resource Due Diligence aims at identifying and highlighting people-related challenges if any. People management and scarce talent issues could crop unexpectedly, jeopardizing operations. The HR due diligence highlights if there are any cultural differences between the two parties. When the cultural differences between companies are rampant and not managed well, they could lead to disastrous consequences. Since it is crucial to consider cultural and employee issues upfront, human resources due diligence preempts and brings forth such challenges.
- Information Security Due Diligence: Information security due diligence is rapidly gaining prominence globally. The process is most commonly undertaken during the information technology procurement to ensure the risks are uncovered.
- Ethical Due Diligence: Ethical risks are a non-financial risk like loss of reputation, governance, ethical values, and more. The ethical due diligence aims at depicting the ethical character of the target company and brings out the possibilities of ethical risks. The process helps an organization to decide whether the prospective partner firm is ethically viable and make an informed choice.
B. Legal Due Diligence:
Legal due diligence covers all the legal aspects of the potential business transaction, liabilities of the target company, potential legal pitfalls, and other related issues. The process involves preparing regulatory checklists, independent checks with regulatory authorities, and document verification. Legal due diligence covers all the intra-corporate and inter-corporate transactions exhaustively.
C.Financial Due Diligence
Financial due diligence analyses and validates all the financial, commercial, operational, and strategic information of the target company. The process is again an intense activity and involves the review of accounting policies, 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, reliability of financial information, internal control systems and more.
The tax due diligence comprises an analysis of:
- Tax compliance.
- Tax contingencies and aggressive positions.
- Transfer pricing.
- Identification of risk areas.
- Tax planning and opportunities.
Most startups do not onboard a full-time CFO until the first round of funding, and until then the CEO/Promoter wears the hat of a CFO. The promoters often struggle to find the time and coordinate with the diligence team. As a founder have you ever wondered what if a part-time CFO is available at your disposal assisting you through the diligence phase, so that the investment happens seamlessly? You can avail the Due Diligence assistance services by The Filings, and get all that you wished for.
- Scope of Services
- How It Works
- Docs Required
The scopes of services include:
- Functioning as a part-time CFO of the Company
- Assistance in keeping the books of accounts in order, for the due diligence to happen
- Enabling the information flow and coordination with the diligence team appointed by investors
- Assistance in finalizing the conditions precedent and conditions subsequent clauses.
Timeline: We act promptly, but the exact time needed for due diligence completely depends on your specific requirements.
Once you choose us, we analyze your requirements and assign an in-house expert ardent in undertaking due diligence. We then work closely with you and deliver the best services befitting your requirements.
We will need information and documents from you. The documents required for each event are requested for, at the right point in time per requirements.
- How can The Filings help me out?
At, The Filings our personnel have the qualification, expertise, and experience needed for due diligence. When you engage us, you can be assured that we shall cover all key aspects to make your merger/acquisition based on hard facts.
- How will the security and privacy of my data be ensured?
The Filings does not share your data with any third party. Your data is safe with us since we have the required technology needed for a highly secure environment.
- How do you pay for the services?
Signing up and making the payments is quick and easy. Just click on the Buy now button, which will lead you to a secure payment page. You can pay via Internet banking/debit/credit cards.
- How can I check the status of the work done?
Once the payment is done, your work will be assigned to one of our dedicated professionals. Reference number shall be allocated to you for tracking purpose. Track your work with ease online through our help desk platform.
- Can you help in preparing the books of accounts for due diligence?
Yes, we The Filings have the experience of working on many due diligence assignments. We can make your books of accounts ready for diligence.
- How can The Filings help me out?
Since the scope of work can vary significantly depending on your specific requirements, we customize the pricing too. Please write to us with your requirements and we can get back to you with a customized quote.