May 10, 2019

Due diligence Process & Checklist

 

Due diligence is an analysis and risk assessment of an impending business transaction. It is the careful and methodological investigation of a business or persons, of the performance of an act with a certain standard of care to ensure that information accurate, and to uncover information that may affect the outcome of the transaction. Due diligence is basically a background check to make sure that the parties to the transaction have the required information they need, to proceed with the transaction. Due diligence is used to investigate and evaluate a business opportunity. The term Due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business.

 

 

  • Types Of Due Diligence:

 

 

In business transaction, the due diligence process varies for different types of companies. The relevant area of concern may include the financial, legal, labour, tax, environment and commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage etc. The most important types of Due Diligence are as follows:

 

 

  • Business Due Diligence: It involves looking of Parties to a transaction, business prospects and quality of investment. i.e.

 

  1. Operational due diligence
  2. Strategic due diligence
  3. Technical due diligence
  4. Environmental due diligence
  5. Human resource due diligence
  6. Information security due diligence
  7. Ethical due diligence

 

 

  • Legal Due diligence (Including Secretarial due diligence): It covers the legal aspects of a business transaction, potential legal pitfalls and other related issues. Legal due diligence covers intra-corporate and inter-corporate transactions.

 

 

 

  • Financial Due Diligence (Including tax due diligence): It covers the analysing and validating all the financial, commercial, operational and strategic assumptions being made.
  • Due Diligence Checklist:

 

Due diligence checklists are usually arranged in a basic format. However, they can be changed to fit different industries. The following are the few types of information or documents to be checked, during the process of due diligence:

  • Basic Information
  • Financial Data
  • Important business agreements
  • Litigation aspects
  • IPR Details
  • Marketing information
  • Internal control system
  • Taxation aspects
  • Insurance coverage
  • Human resources aspects
  • Environmental impact
  • Cultural aspects

 

 

  • Due Diligence Process:

 

 

A Due Diligence process can be divided into three stages:

 

 

  • Pre diligence: It is primarily the activity of management of paper, files and people. The company, would usually receive a checklist from the agency conducting the diligence. The checklist is invariably, exhaustive in nature, and therefore, the company may either collate and compile the documents in- house or outsource this to an external agency. As regards the process of diligence, as a professional care should be taken to scrutinize every document that is made available and ask for details and clarifications, though, generally the time provided to conduct the diligence may not be too long and though things have to be wrapped up at the earliest. The company may be provided an opportunity to clear the various issues that may arise out of the diligence.

 

 

 

  • Diligence: After the diligence conducted, the professionals submit a report, which is common parlance is called the DD report. These report can be of various kinds, a summary report; a detailed report or the like; and the findings mentioned in the report can be very significant, in as much as the deal is concerned.

 


Post diligence: post diligence sometimes result in rectification of non- compliance found during the course of due diligence. There can be interesting assignments arising out of the diligence made by the team by the team of professionals.

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