The term Due Diligence describes a general responsibility to exercise care in any operation. All the remunerations, efforts and analysis to be made by an individual or body corporate, to systematically evaluate or perform any essential deals or contracts, come under this. To perform different types of businesses and transactions in the financial world, it is a vital aspect to be present.
What is Due Diligence?
The different meanings of Due Diligence are as follows:
- It is a risk estimation tool with respect to business operation;
- It is an assessment mechanism with respect to business opportunity;
- It is an instrument which provide impending into conceal facts;
- It takes cares of the present, past and future aspect that affects the commerce.
What are the Objectives and Scope of Due Diligence?
The Objectives of Due Diligence is as follows:
- To identify the strong point and to discover threats and weaknesses
- To take a good quality decision about an investment
- To make a smooth decision
- To develop confidence in shareholders
- To provide a secure level in a transaction
- Collect material information
The Scope of Due Diligence is as follows:
- Depends on the needs of the people who are involved in investments, addressing issues which are not covered, areas of threat and identifying any new opportunities.
- In general, it covers Compliance, litigations, uncovered risks and future investments.
What are Different Types of Due Diligence?
Due Diligence differs for different types of entities. There can be as many as 25 or more angles for observing and analysing day to day affairs of Company. The main types are as follows: Business Due Diligence This typically involves looking at the quality of parties, business scenario, and value of the investment. This type includes: 
Operational This type looks into the operational weaknesses, functioning of the Target Company, degradation or up-gradation related to operational process of Company, economical impact on the operational efficiency of the Company. Strategic In this analysis of business or transaction is checked whether business or transaction is commercially feasible or not. The position of the Company in a competitive environment is also looked into to gain better results later on in the industry. Technology This includes the check on the current level of the technology and the current existing level of the technology. If there is any further investment is required in the Company or not. Environmental This type involves environmental risk associated with a Company. This type includes risk identification regarding:
- Site assessment
- Managing operation at sites
- Reviewing the history of sites and the environmental condition of a site
- Regulatory pollution check of the site
Human Resource This type aims at the issues related to the workforce in the Company. Sometimes, there are cultural differences in the Company, which lead to problems in the Company. It is essential to understand the crucial cultural differences in the Company for a pleasant environment in the Company. Ethical This type calculates the ethical risks involved with the Company. The ethical character of the Company, the reputation of Company, the partner is ethical or not; all these risks are managed under this type.
Legal Due Diligence
This type mainly focuses on the legal aspects of the transactions, legal pitfalls and other law-related issues. Under this type, the examination of the following elements is done:
- Memorandum of Articles (MoA)
- Minutes of Board Meetings
- Copy of all the share certificates issued to employees
- Guarantees to which Company is party
- Licensing Agreements
- Loan Agreements
What are the Advantages of Legal Due Diligence?
The main advantages of Legal Due Diligence is as follows:
- Understand the Target CompanyWhenever Due Diligence is conducted in the Company, all the legal documents are scrutinized. This helps in understanding the Target Company and its operations before the purchase.
- Helps in Determination of Fair PriceWhile analyzing the structural, financial and operational aspects of Target Company, the acquirer finds out about all the pending litigations, employee factor, labor agreements, intellectual property details, etc. of the Company. This analysis gives the acquirer a strong base to negotiate with the Target Company. Hence, this will help in determining a fair price for the acquirer.
- Identification of Future Legal RisksThe pending litigations of the Target Company will cause a major problem for the acquirer. These litigations will lead to a negative value of the Target Company after the takeover by the acquirer. The process will help identify future risks today and eliminate them.
Financial Due Diligence
This type involves an analytical study of business, assessing the key issues facing the Company and drivers behind maintainable profits and cash flows, identifying the vital monetary risks and potential deal breakers of the transaction. The validation of Financial, operational and commercial assumptions is done here. The review of the accounting policies, internal audit, earning sustainability, the value of assets, and structure of deals and examination of the financial system is done in this type.
What are the Objectives of Financial Due Diligence?
The process of Financial Due Diligence is much more than a simple checklist of the procedures of the Company. The main objectives are as follows:
- To Check and reveal any financial risks related to the Company;
- To understand the historical financial situation of the Company;
- To check the correctness of the numbers of the Company;
- To understand the Target Company’s balance sheet;
- To understand Target Company’s profit and loss;
- To go for further price negotiations and opinions on the purchase price;
- To forecast the Target Company’s future financial situation;
- To formulate post-takeover acquisition plans and integration program;
- To calculate the financial risks and avoid such financial risks of Target Company.
Conclusion
Due Diligence would include a thorough understanding of all the obligations of the Company. The rights and responsibilities, pending lawsuits, leases, guarantees, warranties, debts all are analysed for better working of Company in the market. Undergoing, Due Diligence means doing homework on a potential deal and calculate the risks involved with the agreement. We at Corpbiz assist you with steps followed while applying Due Diligence in a Company. Our professionals will ensure the successful completion of your work.