Due diligence is a process of research and analysis that is initiated before an acquisition, investment, business partnership, or bank loan, to determine the value of the subject of the due diligence or whether there are any major issues involved. Such findings are then summarized in a report which is known as the due diligence report. It is analyzing various aspects to estimate entities commercial potential, Assessing the financial viability of the entity in terms of its assets and liabilities at a comprehensive level and examining the operations, and verifying the material facts related to the entity about a proposed transaction
Types of Due Diligence
- 0Business DD:
It involves looking into the parties involved in the transaction, the prospects of the business, and the quality of investment.
- Legal DD:
It mainly focuses on the legal aspects of a transaction, legal pitfalls, and other law-related issues. It covers both inter-corporate transactions as well as intra-corporate transactions. Various regulatory checklists form a part of this diligence along with the already existing documentation.
- Financial DD:
Financial, operational, and commercial assumptions are validated here. This provides a huge sigh of relief to the acquiring company. A review of accounting policies, audit practices, tax compliances, and internal controls is done in detail here.
- Administrative DD
Administrative DD is the aspect of due diligence that involves verifying admin-related items such as facilities, occupancy rate, number of workstations, etc. The idea of doing due diligence is to verify the various facilities owned or occupied by the seller and determine whether all operational costs are captured in the financials or not. Admin DD also gives a better picture of the kind of operational cost the buyer is likely to incur if they plan to pursue expansion of the target company.
- Asset DD
Another type of due diligence conducted is asset DD. Asset due diligence reports typically include a detailed schedule of fixed assets and their locations (if possible, physical verification should be done), all lease agreements for equipment, a schedule of sales and purchases of major capital equipment during the last three to five years, real estate deeds, mortgages, title policies, and use permits.
Areas of Focus in a Due Diligence Report
- Viability: Accessing the viability of the target company can be done through a thorough study of the company’s business and financial plans.
- Monetary Aspect: Key financial data and a ratio analysis would be necessary to understand the complete picture
- Environment: No business operates in isolation. Hence, it is necessary to look into the macro environment and its impact on the target company.
- Personnel: A very important factor to consider is the capability and credibility of the people who are operating the company.
- Existing & Potential Liabilities: Any kind of pending litigations and regulatory issues should be taken into account.
- Technology: A very important factor to consider is the assessment of the technology available with the company. Such an assessment is necessary as it helps decide future actions.
- Effect of synergy: The creation of synergy between the target company and the existing company serves as a tool for decision making.
How does Settlemytax assist start-ups with due diligence
Whenever a start-up goes through due diligence there are 100s of issues reflect in a report. You must hire a professional to handle all the queries and solve the due diligence issues then and there. SettleMyTax assists startups during due diligence with the following activities;
- Getting the documents prepared which are not available
- Co-coordinating with due diligence team
- Making sure that there are no adverse remarks in the Due Diligence report
- Answering all the questions they have