Due Diligence is a process of inquiry, audit, review, or investigation undertaken by companies or large corporations to ensure that the facts provided to them are correct. The duration of due diligence is generally of two weeks to one month. The individuals involved in the due diligence process must enter into an agreement. The agreement will ensure that any information shared between them remains confidential.
What is the importance of due diligence?
The audit of the important facts of a company is important and must be undertaken by companies in a manner that is prescribed by the concerned authority.
- Financial due diligence helps in the evaluation of all the financial aspects of a potential investment or deal to determine the benefits, liabilities, risks, and opportunities.
- It helps in the identification of potential risks associated with any transaction.
- The legal due diligence ensures if there are any mortgages, liens, or other claims against the equipment or asset.
What are the different types of due diligence?
Due diligence has been categorized into various types, understanding these types is important for an entity that is planning to undertake due diligence in its company.
The types of due diligence are as mentioned below –
Legal
Legal due diligence includes the review of the following elements – Memorandum of association, articles of association, minutes of board meetings for the past three years, copy of share certificates, copy of all guarantees, licensing or franchise agreements.
Human resources
Human resources due diligence refers to various aspects such as analysis of the total number of employees, vacancies, notice periods, etc. All kinds of leaves that employees take during their duration with the company are reviewed and analyzed.
Operational
Operational due diligence comprises an evaluation of all the aspects of a company’s operations. All the business activities that occur on the day-to-day, weekly, monthly or annual basis are all reviewed as per the guidelines. The objective is to evaluate the present situations of the technology, assets, and services and extract all hidden liabilities.
Environmental
Under the environmental due diligence, the company reviews and ensures that all the environmental regulations are followed by the company in a proper manner.
Strategic Fit
A strategic fit due diligence refers to the inspection of the company’s goals and objectives and understanding if they align with the company’s plans and strategies. It also understands how the members benefit from the goals.
Self-assessment
Self-assessment due diligence is often disregarded by businesses. But, it is one of the most important aspects. A self-assessment diligence must be conducted after considering an investment.
Financial
Financial due diligence is the audit of the financial records of a company. Financial due diligence involves an analysis of customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of the internal control procedure.
What are the objectives of due diligence?
Due diligence has a certain purpose which it fulfills while undertaking the process in companies and corporations.
- Minimizes the possibility of risk or liabilities
- Adjust the purchase price
- Make amendments in the legal structure of the investment
What is the process of performing due diligence?
The due diligence procedure contains certain steps that must be followed by individuals to complete the process in a successful manner.
The steps to be followed in the process is as mentioned below –
- Understand the compliance concerns
- Define the objective of the business
- Gather important information
- Monitor potentials
- Conduct a risk evaluation process
- Validate information
- Audit the due diligence process
- Establish a monitoring plan
- Review the process on a regular basis
What documents are required to perform due diligence?
Documents are an important part of the process. The individuals must submit the below-mentioned documents for a successful process.
- Memorandum of Association
- Articles of Association
- Certificate of Incorporation
- Financial Statements
- Income Tax Returns
- Shareholding pattern
- Bank statements
- Tax registration certificate
Conclusion
The due diligence process is undertaken in a specific manner and by individuals that are permitted to do so. The documents, types, and importance must be understood in an appropriate manner by the companies and corporations before involving in a due diligence process.
