Due diligence in business terms means a deep dive and review of a company, its capabilities, assets, and financial records. It’s done before a deal and helps the decision-makers to make an informed decision. There could be many reasons for conducting this investigation, like before investing in a company or stock, buying a product or service, mergers & acquisitions (M&A), or finding out the market value of your own company.
Purpose of conducting a Due Diligence
- To validate any information shared regarding the deal.
- To get any additional valuable information that would support in making a decision.
- To assess any potential risk and avoid making a bad business decision.
- To make sure the deal complies with all the criteria as well as legal and government regulations.
Types of Due Diligence
The process is very comprehensive and, there are a lot of aspects that need to be looked into. It could take anything between 30 to 60 days to complete the process. The major areas that are examined during the process are:
- Company’s strategy – This process is required to understand the company’s business plan and reasons for the transaction. It would also give you a good idea about the company’s current market shares, as well as its short and long-term strategy. It’s an important step to evaluate how promising the company’s future looks.
- Financials – Financial due diligence is one of the most important kinds. It checks whether the company in question has declared all its financials correctly. It examines the past audited financial statements, current unaudited financial statements, debtors and creditors, inventory, and the company’s projection.
- Human Resource – Everything related to human resources is checked, like the current employee profiles, vacancies, job descriptions, contracts, salaries, bonuses, leave policy, termination policy, and other benefits.
- Assets – All the assets owned by the company are taken into account when due diligence is done. The purchase and lease documents of the fixed assets like buildings, land, and equipment are reviewed as well as the current condition and valuation. Other intangible assets like Goodwill, brand value and trade secrets are also assessed.
- Taxes – This step includes verification and reviewing of all tax returns filed like income, sales, and withholding, any pending tax payments, the status of any ongoing case with the tax authorities, as well as documents related to any unused tax credits.
- Legal – To run a profitable business it’s essential to meet all the legal requirements. The legal due diligence involves inspecting the documents related to the incorporation, minutes of the annual general meetings (AGM) and other board meetings, loans and credit agreements, and share certificates. During this process, all the litigations are also reviewed as well as threats of any future litigation are assessed.
- Intellectual Property (IP) – IP helps companies get an upper edge against their competitors. Holding a registered patent, copyrights, trademarks, permits, and licenses is sure to increase the creditability of a company. So during this process, it’s essential to verify all the documents and also check if there is any violation of IP.
There are other areas too, like environment, IT, marketing, and research and development (R&D), that might be considered while performing the due diligence.