Due diligence is a thorough examination of a company’s finances, assets, liabilities, structure and operations, prospective and ongoing litigation, and all other pertinent business activity. Because this procedure entails exchanging sensitive data about the company’s financials, operations, finances, legal, and other regulatory information, the parties sign an NDA (Non-Disclosure Agreement) before the due diligence process begins.
1. Due Diligence in Technical and Intellectual Property
It is a study of the technical elements of a product or service, as well as the intellectual property that underpins it. For tech businesses, this is a major issue.
Experts in the field of technology will do due diligence on the matter to see if it is a realistic alternative.
– Is the product in the research or development phase at the moment?
– What potential for development and scalability does it have? – Does it infringe on any patented items that are already on the market?
– Does it provide consumers protection when it comes to sensitive data?
– Has the business taken appropriate steps to safeguard its intellectual property?
– Has the firm provided any exclusive rights to utilize the technology to any other parties?
– Do any of the company’s goods have any pending patents?
- A list of all patents, copyrights, and other intangible assets is included.
- Documents for filing a patent.
- Documents relating to the company’s own unique technology.
- The firm has entered into technology license agreements. – Actionable or non-actionable suits pending against or by the Company for infringement of intellectual property.
2. Tax and Financial Due Diligence
The analysis is done here with regard to historical data for the entire entity or possibly specific projects, review of forecast performance and funding requirements, scrutinizing all documents related to the tax liability, taxes of the company, and finding answers to questions like:-
– Is the current financial position favorable?
– Is the company’s cash flow in good shape?
– Is there any room for growth in terms of scalability?
– Does the company have long-term prospects?
– What is the present state of the company’s financial ratios?
– Is there any tax or regulatory liability for the company?
– Has there been a consistent increase in profitability?
- A copy of the preceding three years’ audited financial statements
- Copy of the preceding three financial year’s Income Tax Return Acknowledgement.
- The most recent CIBIL report and credit score.
- If there is any correspondence with the tax authorities, it is necessary.
- Analysis of fixed and variable costs.
- Financial forecast.
- Debtors and creditors are listed on a schedule.
- Assets and liabilities are listed in a table.
- Orders, notifications, and intimations issued by the tax authorities are copied here.
3. Due Diligence in Human Resources
Understanding the country’s system of employment contracts, labor laws, labor relations, regulatory policies, work culture, and industry standards is part of HR due diligence. In monetary terms, the workforce, which is the human side of a company, has both cost and value.
– What insurance policies do the employees have in place?
– Does the firm provide any retirement plans to its employees?
– Do HR practices fall within the confines of labor laws?
– Are the employment contracts as secure as they may be?
– Does the firm have a high rate of employee turnover?
- Employees Fill out the registration form completely, including all demographic and other information.
- Payroll information.
- The ESOP schedule is as follows:
- Employment contracts and the terms that apply to them.
- There are all of the HR policies in place.
- Complaints and grievances are kept on file.
- Resolved grievances, pending complaints, and so forth.
- Cases of sexual harassment in the workplace, if any exist.
4. Due Diligence in Law
This is done in order to analyze the company’s legal and regulatory risks. Legal compliance is sometimes the most difficult and time-consuming task. The majority of this has to do with Ministry of Corporate Affairs regulations.
- It entails the investigation of:-
- Association Memorandum.
- Articles of Incorporation
- Agreements on employment.
- The firm has entered into licensing and franchise partnerships.
- The firm is a party to loan and guarantee arrangements.
- Documents relating to any finance agreements the firm has made.
- Copies of litigation brought against the firm, either now pending or previously filed.
- If there are any equipment leases, these will be entered into.
- The firm has entered into real estate deals.
- Contracts of substance, such as joint venture agreements, partnerships, and other similar arrangements.
- Board Meeting Minutes from the past three financial years. – All of the registrations are for the firm.
- The following is a list of the directors and other significant managerial individuals, as well as their contact information.
- Receipts for taxes paid.
- All regulatory, legislative, and company compliance certificates are included.
- All RoC filing must be certified genuine copies.
- Details of any completed or pending Settlement Agreements that the Company has entered into.
- Any labor-related lawsuits’ specifics.
- Any injunction orders issued by a competent court should be copied (if any).
5. Final Note
Due diligence is a time-consuming and important activity. The output has a high level of relevance since it assists the investor in making an educated choice about whether or not the firm is worth investing in. As a result, in order to achieve the greatest results, the process must be exceedingly complete and detailed.