Due Diligence for Investments

corporate and regulatory services

Due Diligence for Investments

Investment due diligence, as covers a wide range of investors and investing scenarios, including start-up and VC funding, M&A, debt finance, and long-term supply contracts. The nature and scope of the due diligence can vary significantly depending on the scenario. Some variations of the due diligence approach under the different scenarios will be highlighted later, but the general principles reviewed apply in all cases. The purpose of investment due diligence is to confirm the investor’s initial understanding of the investment opportunity, underpinning the terms agreed with the business’s owner in the preliminary negotiations. As a result of the due diligence, the investor may come to a different or more nuanced understanding of the opportunity and seek to renegotiate the initially agreed terms or even decide to decline the investment. For the same reason, investment due diligence commonly results in the investor negotiating additional, more detailed terms and conditions in its final agreement with the business’s owner. One  reasoning behind this situation was due to the reluctance of the company to “open the kimono” to extensive due diligence proceedings, which could have compromised the investment terms at the time.


The investigation or inspection would cover:


  • Compliance with applicable laws
  • Regulatory violations or disciplinary actions
  • Litigation and assessment of feasibility of pursuing litigation
  • Financial statements
  • Assets – real and intellectual property, brand value etc.
  • Unpaid tax liens and/or judgments
  • Past business failures and consequential debt
  • Exaggerated credentials/Fraudulent claims
  • Misrepresentations or character issues
  • Cross-border issues – double taxation, foreign exchange fluctuation, sovereign risk, investment climate, cultural aspects.
  • Reputation, goodwill and other intangible assets.


Factors To Be Kept In Mind


In this regard:


(i) Be clear about expectations in terms of revenues, profits and the probability of the target company to provide you the same.

(ii) Consider whether you have resources to make the business succeed and whether you are willing to put in all the hard work, which is required for any new venture.

(iii) Consider whether the business gives you the opportunity to put your skills and experience to good use.

(iv) Learn as much as you can about the industry you are interested in from media reports, journals and people in the industry.

(v) Steps to be followed in due diligence process:


  1. Negotiation for time
  2. Risk Minimisation
  3. Information from external sources
  4. Limit the report with only material facts
  5. Structure of information

Types of Investment Due Diligence

In different investing scenarios, a typical due diligence will include commerciallegalfinancial and tax due diligence.


  • Commercial due diligence covers the target business’s market positioning and market share, including drivers and prospects.


  • Legal due diligence covers a wide scope of legal matters, including proper incorporation and ownership, contractual obligations, ownership of assets, compliance, and litigation.


  • Financial due diligence has a wider perspective because it seeks to both:
    • Validate the investor’s valuation assumptions by looking at historical performance, if available, and concluding on whether it is consistent with projections and
    • Identify financial uncertainties and exposures which could disrupt the business, or result in additional costs to the investor.
  • Tax due diligence could be viewed as an extension of the financial due diligence, where the focus is on identifying potential additional tax liabilities arising from non-compliance or errors.


Further types of investment due diligence are technical, environmental and regulatory, performed when the impact of these areas on the business is significant. Depending on the situation, the due diligence may need to address very specific and narrowly defined topics, as long as they are factors for the valuation and assessment of the risks of the investment opportunity.