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Due diligence is a process of research and analysis that is initiated before an acquisition, investment, business partnership or bank loan, in order 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.
Due diligence is a process of :
Mergers and Acquisitions:
Due diligence is done from the viewpoint of the seller as well as the buyer. While the buyer looks into the financials, litigation, patents and an entire range of relevant information, the seller focuses on the background of the buyer, the financial capabilities to complete the transaction and the ability to fulfil commitments taken.
Due diligence is done for strategic alliances, strategic partnerships, business coalitions and such other partnerships.
Joint Venture and Collaborations:
When one company joins hands with another the reputation of the company is a matter of concern. Understanding the other company’s stand and measuring the adequacy of resources at their end assumes importance.
Aspects included during making a public offer are decisions on public issues, disclosures in a prospectus, post issue compliance and such other matters. These would usually require due diligence.
Finding skeletons in the closet before the deal is better than finding them later” is a relatable aspect when it comes to due diligence. The information collected during this process is crucial for decision making and hence needs to be reported. The Due Diligence report helps one understand how the company plans to generate additional earnings (monetary as well as non-monetary).
It serves as a ready reckoner for understanding the state of affairs at the time of purchase/sale, etc. The ultimate purpose is to get a clear picture of how the business will perform in the future.
|1. Business Due Diligence:||It involves looking into the parties involved in the transaction, prospects of the business and the quality of investment.|
|2. Legal Due Diligence:||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.|
|3. Financial Due Diligence:||Financial, operational and commercial assumptions are validated here. This provides a huge sigh of relief to the acquiring company. Review of accounting policies, audit practices, tax compliances and internal controls are done in detail here.|
The due diligence report should provide the desired level of comfort about the potential investment and also the inherent risks involved. The report should be able to provide the acquiring company with information such that no onerous contracts are signed which could potentially harm the existing return on investment.