As mentioned in our previous Article, due diligence exercise empowers a buyer in assessing the value of the target business, verify the business information and assess risks associated with an acquisition.

Due Diligence is a lengthy procedure undertaken to fully evaluate the business, assets, capabilities and financial performance of the target company. There are various modes of due diligence, discussed hereunder. 

 

PROCESS OF DUE DILIGENCE

Due diligence process is a revolutionary fact-finding task that helps you to evaluate your target and determine whether or not the transaction is suitable for your business. If properly accomplished, the due diligence process will allow you to identify potential deal breakers / shapers and provide guarantees that the acquisition is the correct resolution on the proper value.[1]

The due diligence process includes the principal (the buyer or investor), an accountant, and an attorney. In a company acquisition, due diligence is sometimes done after the agreement to buy documents is signed but before the formal acquisition settlement.[2]

Subjects included in the due diligence process includes:

Monetary information, stability sheets, income statements for previous years, estimated monetary statements, insurance, tax returns, and funding statements are the most important subjects for the due diligence course. Part of the company's investigation can involve viewing the incorporation articles and by-laws, minutes of the meeting, and state-submitted creation paperwork.[3]

Areas of Focus in a Due Diligence Report[4]:

i.                    Viability: Accessing the viability of the target firm can be done through an in depth analysis of the firm’s business and financial strategies.

ii.                  Monetary Aspect: To understand the full picture, key financial data and a ratio analysis would be necessary.

iii.                Environment: No firm operates in isolation, Hence, the macro environment and its impact on the target firm must be examined.

iv.                Personnel: Important factors to remember are the skills and credibility of the people who are operating the company.

v.                  Existing & Potential Liabilities: Any form of pending litigation and regulatory concerns should be considered.

vi.                Technology: An important factor which must be considered is the assessment of the technology available with the firm. It will determine the future course of action of the firm.

Process of due diligence includes[5]:

i.                    compliance concerns

The number of regulations levied upon the company continues to increase in the ever-growing corporate environment. For compliance of these regulations, it is necessary that firm is aware of these regulations in the 1st instance.

ii.                  corporate objectives

The due diligence process needs to comply with the firm's possible economic, political, reputational, and financial risks.

iii.                gathering key information

Information must be collected on a variety of bases, such as political ties, board members, incorporation papers, main shareholders, etc.

iv.                screen prospective third parties against watchlists

Watchlist screenings will decide whether some sort of significant risk is raised by the particular party. The organization should be tested against law enforcement points lists, global sanctions list, debarred company lists released, and so on.

v.                  conducting a risk assessment

Preparation of the risk assessment has to be made. The evaluation must take into account points such as high rates of government intervention, country risk and financial risks resulting from internal factor deficiencies.

vi.                validate the information collected

When the risk evaluation phase has been completed, the next phase in the due diligence process is to check and confirm all the information that has been procured.

vii.              record the process

a record of due diligence process must be maintained. All related reports and documentation should be included on the record. This record will allow an individual to measure the return on investments later.

viii.            draft an on-going monitoring plan

There needs to be careful monitoring throughout to prevent any sort of unforeseen issues.

ix.                review the process regularly

A company will continue to adapt to the changes. Periodic evaluations should be carried out, and appropriate changes should be integrated into the process.

 

CONCLUSION

If any modification or addition in the entity is considered as a contract with a new supplier or an acquisition of another entity, a due diligence report will give the necessary knowledge and confidence to achieve the desired goal of the deal. This report identifies issues one can address early in the process. The results will provide accurate details while allowing an organization to assess the true value or business expense. Due diligence also applies to negotiating the agreement which helps the company to negotiate the best terms and conditions.

Thorough due diligence is very crucial for any successful acquisition. It is difficult to make the best-informed decisions on mergers and acquisitions without full and detailed knowledge of the target company. In a proposed merger or in a situation where stock shares in the acquiring company constitute a major part of the purchase transaction, the target company may look to the acquirer to perform its own due diligence.

 

Ms. Megha Kamboj & Ms. Monika Sainik are 3rd year students of Maharastra National Law University, Mumbai & are interns at Corp Comm Legal under Mr. Bhumesh Verma


[1] “Due Diligence Process: Everything You Need to Know”, Upcounsel, April 1, 2020, https://www.upcounsel.com/due-diligence-process

[2] Ibid.

[3] Supra note 46.

[4] “Due Diligence Report-Process, Importance and Types”, Cleartax, April 1, 2020, https://cleartax.in/s/due-diligence#areas

[5] Supra note 46.


  • To Read, Due Diligence: A practical overview by Anshul Ramesh and Avesh Harshan- PART-I, Click Here
  • To Read, Due Diligence: Need and Benefits by Anshul Ramesh and Avesh Harshan- PART-II , Click Here

  • To Read, Due Diligence: It's Types by Megha Kamboj & Monika Saini- PART-III, Click Here