Due Diligence is a background check to reveal misrepresentation and fraudulent dealings in a business transaction. From the investor's perspective, due diligence meaning is to make them feel safe that they are investing at the right place and have all the information regarding the credibility of the company. This process gives better learning about the existing customers and other partner relationships of the company. The Due Diligence reports help get either positive assumptions or alerts about any potential irregularities. From a startup's perspective, Due Diligence helps them reveal the fair market value of the company. An investment in quality due diligence helps in getting the best investor for business growth and expansion.
In other terms-
- It mitigates and analyses the risks arising out of any investment decision.
- It provides the public information on any stock
- Single due diligence works for several other purposes.
- It compares your numbers with other competitors.
Due Diligence analyses various aspects of estimating the commercial potential of an entity. It assesses the financial viability of any entity at a comprehensive level and performs a proper verification of the transaction.
Due diligence for startups
Startups are rising rapidly with innovative ideas or technology in use. Today, a good business idea attracts the best investors for their future growth prospects. Your answer to the query “what is due diligence” is that it is a process that presents the potential of your business idea and the depth of your business strategy to the investors.
Good Due Diligence -
- Includes an exit strategy to showcase your capital recovery options.
- Displays the advantages of a partnership firm where partners lose less in case of business failure.
- Figures out the scope of technological advancements in the business to survive in the changing world.
- Gives deep insight to increase the return on investment.
- Evaluates your business plans and make them appear more realistic
A Due diligence report gives an overview of your business proceedings. It is a part of the secretarial service of the company and helps gain the attention of the investors and gives a breather to your growing startup. The process of due diligence needs expert hands for a better draft to be presented at the time of attracting investors.
Scope of Due Diligence
Due diligence is performed extensively to display the past and current performance of the company. It is the best parameter to assess the future prospects of the company
to undertake an acquiring firm to assess the target company’s business, assets, capabilities, and financial performance. Due diligence can be performed for-
Mergers and Acquisitions
Due diligence is done from the sellers' and buyers' perspectives separately. The buyers prepare it for the financials, litigations, patents, or any other relevant look-over. It displays the financial capabilities of your company to complete the transaction and the ability to fulfill any commitment.
Due diligence is helpful at the time of alliancing with other business combinations
Joint Enterprise And Collaborations:
The reliability of any company comes under the scanner at the time of collaboration. Due diligence is the best solution to all the problems relating to “what is Due Diligence”.
- Strategic Alliance
- Business Coalitions
- Outsourcing Agreement
- Technology or Product Licensing
- Joint venture through technical or financial Collaboration
- Venture Capital investment
- Public Issue
Types of Due Diligence
Due Diligence is required when a potential investor or buyer demands a comprehensive risk and opportunity assessment of the business. The Due Diligence report gathers a huge amount of information across all areas of the business. It requires looking into the past and current performance while confirming the accuracy of the reports within the reports.
Business Due Diligence: It looks into the parties involved in the transaction for prospects of the business and the quality of investment.
Legal Due Diligence:
It focuses on the legal aspects, legal pitfalls, and other law-related issues regarding any transaction. It covers inter-corporate transactions and intra-corporate transactions as well. It also includes several checklists along with the existing documentation.
Financial Due Diligence
The Due Diligence report validates financial, operational, and commercial transactions for the company willing to acquire the other. It gives a detailed review of the accounting policies, audit practices, tax compliances, and internal controls.
Benefits of Due Diligence
The process of Due Diligence gives a detailed view of the risks, liabilities, and business problems of the company before finalizing the transaction in a bid to avoid losses and bad press at a later stage. Its benefits are-
- Analysis of the administration and ownership of the company
- Examining the capitalization of the company and volatility of the market.
- Research and compare the business competitors and industries.
- A better interpretation of the balance sheet.
- Examine any rise or fall in revenue, profit, or any margin bearings.
- Gives an outline of the ongoing risks and tracks any unforeseeable threat beforehand
- Analysis of stock prices regarding their stability and fluctuation.
Due Diligence is a painstaking process. The process can be skimmed over to save time and money. However, thorough Due Diligence avoids costly mistakes at a later stage. It is the best option for the investor to go through the current performance of the company and predict its future growth and expansion.