As per the McKinsey Global Survey on the Merger and Acquisition practices and capabilities the company management regularly report that the companies involved, regularly examine the portfolio of the target companies that show them whether it is worth investing or not.
The due diligence involves an investigation or audit of any potential investment or audit of any product that you or your company might be investing in. It is a method to also confirm that whatever amount you are investing in the product or company is worth every penny.
In short, it is a research that is done by an investment company before entering into any kind of agreement or financial transaction with another party.
The process of due diligence is a very intricate and sophisticated process that require special skills so that the individual can decide upon the delicate business decisions. The process of due diligence requires a whole lot of things so that the investors can look into the affairs of the company ranging from case laws they are involved into an intellectual property that the company owns.
The laws in India cast a duty upon the person making the investment to find out the truth about the company or its assets. Section 3 of The Properties Act states that the person investing in the property is presumed to have information about the facts presented to him or her are true or not.
Indian law has included mandatory provisions for due diligence process in India. The mandatory provisions have been introduced in the Security and Exchange Board of India(Mutual Funds) Regulations 1996 and for offshore offerings by Indian companies through American or Global Depository Receipts.
The goal of any due diligence is to avoid a bad business or investment decision Don C Johnson(Trace Investigation Founder)
The goal of any due diligence is to avoid a bad business or investment decision
Don C Johnson(Trace Investigation Founder)
Merger and Acquisition reacquire big changes in the running of company process and also the organizational structure of the company even if the company being taken over is a small one or if the deal involved is a small one there is a requirement of due diligence into the companies involved.
The corporate deal-making has faced a lot of changes in recent times, no more are the investors just relying upon the words of the company management they now conduct focused and in-depth investigation into companies and investments they are focused on making.
The due diligence process involves six steps that the investigators need to incorporate while conducting any kind of corporate investigations. The steps involved include the following processes.
Any acquiring process is an extensive process that is taken up by the acquiring company so that they can assess the target companies complete financial records, assets and capabilities, and financial performances
The main type of due diligence are:
When a company is involved in the process of investing in a company the most essential and important type of due diligence that is conducted by a company is checking whether the financials that are showcased in the report is accurate or not. The financial due diligence will provide a thorough understanding of all the company financials.
The financial due diligence is not restricted to the audited financials of the company also unaudited financial statements. These unaudited financial statements of the company should be compared with the financial statements of the last 3 years that are submitted by the company with MCA.
This comparison of the financial statement will help the investigator to examine the companies projections and basis of projection such as capital expenditure of the company, schedule of the inventory and list of all the debtors and creditors of the company.
Tax due diligence involves looking into tax liability of the company; the process is sometimes overlooked by many potential investors as they keep their focus on the earning analysis of the company or other due diligence processes.
The tax due diligence involves a comprehensive examination of different types of taxes that are imposed upon the business and other taxations that the company will be levied based on its jurisdiction. The tax due diligence makes it possible for the investor to understand the significant tax exposure of the company.
The tax due diligence of the company will not only include income tax but also GST returns, employment taxes and property tax. The tax DD also includes a review of transfer pricing and any kind of foreign tax credit issues faced by the company. Analysing non-tax documents such as minutes of the board meeting, compensation plans and financial statements of the company.
To summarise the tax due diligence includes a review of the following:
Every company has some kind of Intellectual property asset whether it be trademark, patent or copyright. Each of these Intellectual property increases the value of the company in the eye of the investors.
The intangible assets of the company differentiate the product of the company from that of others and hence are considered the most valuable assets of the company and the ones that bring them to another level in comparison with their competitors
When a person or investigator is conducting due diligence they are required to look into the following:
The legal, due diligence involves collecting, understanding and assessing the legal risks that are involved during the merger and acquisition process. The acquirer of the company reviews all the legal documents pertaining to the target company.
The main reason behind such an investigation is to see that the acquired company does not face any kind of future legal problems. Hence this makes Legal, due diligence an essential part of the merger and Acquisition process and provides the acquirer company with an insight in the target company as this process brings into focus the subtle things of the company which are otherwise overlooked. Such as suits that involve employee and labor arrangements and any of the cases involving infringement of intellectual property.
Value drivers determine the price and structure of the transaction and define the nature and scope of due diligence. The key value drivers are:
Due diligence is a process through which the investigators obtain information about the company function and circumstances or set conditions and uncover the circumstances that were and are influencing the business decisions.
Due diligence in some cases has saved the companies and world from big frauds that were aimed at stripping the shareholders of such companies from their money and assets that they had invested in the company.