"Discreetly Doing Due Diligence!"
In an investigation or audit of a potential investment, Due diligence serves to confirm all material facts in regards to a sale.
Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with the third party. Offers to purchase an asset or investing in a company are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else that is deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer or investor. Whether the Items that are considered for the sale are within the buyer's/investor ability to purchase/invest. As well as other items that would affect the purchased/invested entity or the seller, after the sale/investment has been completed. Due diligence is a way of preventing unnecessary harm to either party involved in a transaction.
There are many reasons for conducting due diligence, including the following:- Verifying that the business is what it appears to be;
- Identifying the potential "deal killer" defects in the target and avoid a bad business transaction;
- To gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions;
- Verification that the transaction complies with the investment or acquisition criteria.
Initial data collection and evaluation commences when a business opportunity first arises and continues throughout the talks. A thorough detailed due diligence is typically conducted after the parties involved in a proposed transaction have agreed on principle that a deal should be pursued and after a preliminary understanding has been reached, but prior to the signing of a binding contract.
While conducting due diligence generally a checklist of required information has to be created. Management of the target company essentially has to provide the basic information and factual documents. Financial statements, business plans and other documents are to be reviewed. In addition, interviews and site visits are conducted. Finally, thorough research and investigation is carried out with external sources -- including customers, suppliers, industry experts, trade organizations, market research firms, and such others.
Certain activities conducted during due diligence can breach confidentiality that a transaction is being contemplated. For example, contacting a customer to assess their satisfaction with the target company's products might result in a rumour spreading that the company is up for sale. Accordingly, to maintain confidentiality, we often contact customers under the guise of being a prospective customer, journalist, or industry analyst.
A well-run due diligence program cannot guarantee that a business transaction will be successful. It can only improve the odds. Risk cannot be totally eliminated through due diligence and success can never be guaranteed.
Scope of Due Diligence
During Due Diligence generally we cover following area:- Financial Information Due Diligence
- Annual and quarterly financial information for the past three years
- Financial Projections
- Capital Structure
- Other financial information
- Trend Analysis of sales and expenses
- Title Verification
- Products Due Diligence
- Description of each product
- Product Mix
- Customer Information Due Diligence
- List of top 15 customers for the past two fiscal years and current year-to-date by application
- List of strategic relationships
- Revenue by customer
- Brief description of any significant relationships severed within the last two years.
- List of top 10 suppliers for the past two fiscal years and current year-to-date with contact Information
- List of customer complain/grievances and their resolve status
- Customer Risk associated with Business Cash Flow
- Competition Due Diligence
- Description of the competitive landscape within each market segment
- Marketing, Sales, and Distribution Due Diligence
- Strategy and implementation
- Major Customers
- Principal avenues for generating new business
- Sales force productivity model
- Ability to implement marketing plan with current and projected budgets
- Research and Development Due Diligence
- Description of R&D organization
- New Product Pipeline
- Management and Personnel Due Diligence
- Organization Chart
- Historical and projected headcount by function and location
- Summary biographies of senior management
- Compensation arrangements
- Discussion of incentive stock plans
- Significant employee relations problems, past or present
- Personnel Turnover
- Any complain/grievances and their resolve status
- Management Philosophy and Team Motivation
- NDA & SLA Review
- Legal and Related Matters Due Diligence
- Pending lawsuits against the Company
- Pending lawsuits initiated by the Company
- Description of environmental and employee safety issues and liabilities
- List of material patents, copyrights, licenses, and trademarks
- Summary of insurance coverage/any material exposures
- Summary of material contacts
- History of other regulatory agency problem, if any
- Contract and Agreement Review and Exception Report
- Secretarial Compliance Due Diligence
- Annual Return Filing Report
- Capital Changes Report
- Current Shareholding Pattern and Changing Report
- Board Resolution Review and Exception Report
- AGM & EGM Minute Book Review Exception Report
- ROC Compliance Report
- Risk Associated with non-compliance
- Taxes Compliance Due Diligence
- All Tax Return Filing Report
- Tax Application Review Report
- Status of All tax Compliance and Pending Report
- Status of all Tax Notices and Appeal Report
- Risk Associated with tax notices and appeal
- ROC Compliance Report
