Due diligence is often considered difficult or problematic by several companies without understanding that it is important to get it executed in smooth fashion. It basically refers to the process of holding investigations/audits for examining company activities before acquisition along with public listings, refinancing, restructuring, disposal or similar activities. Due diligence aims at boosting overall understanding of vital corporate information as far as investors are concerned. This enables informed decisions for investments.

Various types of due diligence

Here are the types of due diligence that you should be aware of:

  • Legal Due Diligence– This works out any potential legal issues while investing in a business or buying the same. Some of the vital legal papers are reviewed by legal practitioners in the process, including minutes of board meetings, employment contracts, articles and memorandum of association, copyrights, patents and other property linked documents.
  • Tax Due Diligence– This ensures that the firm of the seller does not have any previous taxation liabilities which may have been due to deception/mistakes and may be passed down to the acquiring entity.
  • Operational Due Diligence– ODD refers to an extensive analysis of the operational aspects of the organization during the mergers and acquisition process. This reviews main company operations while attempting to confirm whether the core business plan is in sync with operational facilities and capital expenditure.
  • Intellectual Property Due Diligence– This analyzes various company rights in relation to multiple intellectual properties including copyrights, patents, trademarks and more.
  • Commercial Due Diligence– Commercial due diligence will aim at understanding the operations of the company in relation to its key market, forecasting future growth of the market and customer interactions for building an opinion about the business.
  • Information Technology Due Diligence– This refers to identification of information technology infrastructure along with covering aspects like scalability of systems, process documentation levels, process efficiencies, compliance with regulations, integration of multiple systems, etc.
  • Human Resource Due Diligence– In this process, analysis covers compensation schemes, employment records, ongoing HR based litigation, HR procedures and overall effectiveness of cultural aspects and sales force.

Documents needed for this purpose

  • MOA (Memorandum of Association)
  • Certificate of Incorporation
  • Articles of Association
  • Shareholding Pattern
  • Financial and Bank Statements
  • Income Tax Returns
  • Property Documents
  • Tax Payment Receipts
  • Tax Registration Certificates
  • Statutory Registers
  • Intellectual Property Registration/Application Documents
  • Employee Records
  • Utility Bills
  • Operational Records

Due Diligence Steps

  • Understanding compliance linked concerns
  • Defining corporate objectives for the procedure
  • Garnering vital information
  • Screening potential third parties from watch lists
  • Executing risk assessment
  • Validating information that is collected
  • Recording the entire procedure of due diligence
  • Establishing a plan for tracking/monitoring
  • Reviewing the procedure for due diligence regularly

Checklist for due diligence procedures

  • Accounts payables and receivables
  • Income statement
  • Last 2/3 years profit and loss records
  • Tax returns and balance sheets for last 3/4/5 years
  • Utility accounts, cash deposit and payment records
  • Bank loans, letters/lines of credit
  • Audit files
  • Minutes of management/directors’ meetings
  • Privacy information
  • Seller’s claims about business
  • Vehicle, fixture, equipment and plant details
  • Business intellectual assets
  • Partnership agreements
  • Existing staff/client contracts
  • Lease arrangements
  • Details of automated financial systems of company

Details of historical and credit searches linked to the business

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