INTRODUCTION
This is an internal memo to members of the executive team who are evaluating the transaction and is a requirement for closing the deal. Due diligence is done for strategic alliances, strategic partnerships, business coalitions, and other partnerships. It is the investigation carried out prior to a financial transaction to enter commercial and legal risks, as well as opportunities. A Due Diligence Report is used in the case of a company that is for sale or considering a combination or the acquisition of another organization. The format of a due diligence report, as well as what is included, may vary depending on the industry and the purpose of the report. For instance, a due diligence report for a real estate investor may be extremely different from that of a software developer considering a merger. But many of the key points, along with the best ways to present data, look the same. It can help to identify a company’s valuation and allow investors, business partners, and other stakeholders to make educated decisions regarding the company’s future.
Following a due diligence checklist can ensure your due diligence report:
Conveys all the information necessary for educated business decisions
Is easy to follow?
Is factually accurate?
Supports all financial data with background materials or supporting documentation
TYPES OF DUE DILIGENCE
There are three types of due diligence reports that are prepared in order to find out the respective desired details, before moving ahead with the transaction:
1. Business Due Diligence
This type of Due Diligence is about the detailed assessment of the parties involved in the transaction, various business aspects, and the investment qualities involved.
2. Legal due diligence
As the name suggests, it focuses on the legal aspects of transactions, legal pitfalls, deficiencies, and other legal issues. Transactions covered in this type of report include both inter-company and intra-company transactions. Along with this, there are several regulatory checklists used to complete this type of due diligence, including existing documentation
3. Financial expertise
This type of due diligence takes into account all financial, operational, and market assessments. Enabling this type simplifies the company acquisition process. Estimates and in-depth studies of a company's accounting policies, auditing practices, and tax compliance are analyzed in this due diligence category.
ELEMENTS OF DUE DILIGENCE
Viability: The viability of a target company can be accessed by carefully examining the company's business plan and financial plan.
Currencies: Analysis of key financial data and ratios is essential to understanding the full picture. This helps in a critical aspect
Environment: No business operates in isolation. Therefore, it is necessary to study the macro environment and the impact on target companies.
Employee. A very important factor to consider is the competence and reliability of the people running the company.
Existing and Potential Liabilities: You must consider all current legal and regulatory issues. Skills: A very important factor to consider is an assessment of the skills available to your company. This evaluation is necessary because it helps determine future actions.
Synergies: This means power gained by two people by working together Creating synergies between goals and actors becomes a decision-making tool.
DRAFTING A DUE DILIGENCE
A due diligence report requires you to answer three questions.
Who is your target audience?
What is the purpose of the report?
What are the key aspects of decision-making? Due diligence reports cover the following areas:
We carefully examine the business and financial aspects of the target company to assess its viability. He analyses ratios and financial data to understand the monetary side of proposed deals. There is also a focus on analyzing a company's macro environment and its impact. This is necessary because no business operates in isolation. An important factor to consider is the competence and trust of the people running the company. Due diligence reports also address pending litigation and regulatory issues. The analysis that matters now is the type of technology available to the company. This becomes important because technology plays a key role in determining a company's future behavior. It also aims to create synergies between the two companies that can help in decision-making. The need for legitimate reporting to delegations During the due diligence process, the main goal is to look for red flags before closing the deal. This helps identify potential future hazards. The information gathered through this report is invaluable to decision-making. Negotiations may be allowed if the company finds deficiencies during due diligence. This report allows the company to understand how the target plans to generate additional revenue. It serves as a counter that identifies situations such as when to sell or buy.
The main purpose of this report is to give dealers a clear idea of how their business will perform in the future. Information about the company's finances. It consists of the previous year's financial statements, filed tax returns, and accounts receivable documents. Information relating to debt and credit may also fall into this category. Information about company employees. This category contains information about people holding positions in the company and represents their work experience. It may also include information about retired employees and information about pensions. Information about company assets. This category contains detailed information on various objects, technologies, and company assets, such as intellectual property rights and copyrights. Information about our partners, suppliers, and customers. This includes data about the different parts of a company's supply chain and how they relate to each other. Legal information about the company. This includes data regarding any pending litigations, contracts, licenses, and permits with the company.
SECTION OF DUE DILIGENCE REPORT
The various sections of a due diligence report can be categorized as follows:
1. Company Records: The legal counsel seeks to review the principal formation documents of a target company, including the articles or certificate of incorporation and bylaws if the target company is a corporation, or the articles or certificate of organization and operating agreement if the target company is a limited liability company, including all amendments.
2. Financial knowledge: It involves the review of the copies of financial statements for the past five years that have been audited, including all notes and management’s discussion and analysis.
3. Indebtedness: It involves an analysis of the indebtedness of the seller in terms of loan agreements, mortgages, notes, and security agreements; reviewing the relationship with lenders, and constant commercial code searches with each daughter company. Employment and Labour: It includes the detailed lists of officers, directors, and all the employees; documents related to pensions, any profit sharing, pensions, deferred compensation, stock plans, and other nonsalary compensation or benefits; and any pending litigations related to labor and employment law.
4. Freehold: It includes copies of documents like insurance policies of the real property, appraisals and all studies, site evaluations, and government filings and reports prepared by consultants.
5. Agreements: All agreements of the company and its subsidiaries, real estate leases, partnership or joint venture agreements; marketing, sales, commission, distributor, franchise agreement; brokerage or investment banker agreements; client agreements; licenses and subscriptions and other material contracts. Supplier and Customer information: It includes the list of material customers and suppliers and the correlation with the customers or suppliers related to disputes.
6. Lega formalities: It includes copies of reports filed with government agencies, details of all the litigation and legal matters, copies of government licenses, and any liabilities relating to environmental laws.
CONCLUSION
The due diligence report should provide the desired level of comfort about the potential investment and also the inherent risks involved. This report should be able to provide information to the acquiring company that no burdensome contracts will be signed that could potentially harm existing investment income. Due diligence reports are just as important as business transactions. This should be done as diligently as possible. All required details must be included in the report. Various elements of the report are transaction-specific. The report, therefore, includes all important results of the due diligence process. It also provides a better picture for investors of the companies under study. A complete and well-documented due diligence report complements the decision-making process. Due diligence reports, therefore, become an important part of the transaction. Writing a due diligence report can often seem like an intimidating task, but following the right process and using the right checklist can make the job easier.
eStartIndia will help you with the Due Diligence of the Company from the comfort of your home.
Author:
Leave a Comment
Previous Comments