WHAT IS DUE DILIGENCE?
Checking if information Provided by seller/investee is correct.
Due diligence is an investigation of the business prior to signing a contract, or an act with a certain standard of care. It is the authentication of the information or an investigation to confirm all facts, such as reviewing all financial records, plus anything else deemed material.
WHY IS DUE DILIGENCE IMPORTANT
To Uncover any Problems BEFORE You Buy and Avoid Surprises.
Are all the licenses in place. Is there any threat to the business because of government regulations?
Checking all legal cases and whether the legal costs are manageable?
Are staff being paid correctly? Are there any HR liabilities such as leave entitlements?
Does the business currently rely on any particular member of staff? Are they staying on when the business changes hands?
Identifying cost saving mechanisms that will help you when you take over.
Financial, Legal, Business, Operations, Human Resources.
It includes an analysis and review of the sellers/Investees financial statements, tax returns, accounting policies, and financial trends. It serves as the starting point for your due diligence process.
This step requires a thorough analysis and review of corporate documents; contracts and agreements; ongoing, pending and potential litigation; environmental factors; and legal and regulatory compliance.
It requires the analysis and review of strategic and business plans, customers and products, and markets and competition. It will help you identify whether the industry is about to undergo a change and whether one customer comprises a large majority of the sellers/target’s customer base, therefore presenting risk should that customer leave subsequent to closing the transaction.
It includes the analysis and review of the sellers/investees technology, fixed assets and facilities, as well as real estate and insurance coverage. It also looks at whether there is any significant operational risk that affects pricing or executing the deal at all.
It looks at the organization’s structure, employee benefits, management and personnel, and labor matters. For example, are there any union disputes or issues with employee non-competes
what are the things to keep in mind while conducting DUE DILIGENCE?
There’s A Lot More To Every Business Than Its Financials: Although the financial history of a company is very important and you want to be certain the seller hasn’t “cooked the books”, a proper due diligence goes far beyond the financial analysis. Many people get trapped looking solely at financials and completely forget about the other key areas to be reviewed. It’s a recipe for disaster! If the numbers check out then great but there’s a whole lot more that can cause problems later on that must be investigated.
What are the documents/things to check during DUE DILIGENCE?
Depending on the nature of organization(proprietary, Private ltd etc), below are few examples of things that can be checked. Some of these may not be applicable to few businesses.
- Articles of Incorporation and all amendments thereto.
- Minutes of all Board of Directors, Committee and Shareholders meetings and all consents to actions without meeting.
- Material information or documents furnished to Shareholders and to Directors during the last two years.
- All certificates applicable to the company and their verification and duration.
- All applications and permits for issuance/transfer of securities.
- Sample copy of stock certificates, warrants and options.
- Convertible debt instruments.
- Other contracts, arrangements, or public or private documents or commitments relating to the stock of the company.
- Any debt arrangements, guarantees or indemnification between officers, directors or the shareholder and the Company.
- List of banks or other lenders with whom company has a financial relationship (briefly describe nature of relationship – lines of credit, equipment lessor, etc.).
- Credit agreements, debt instruments, security agreements, mortgages, financial or performance guaranties, indemnifications, liens, equipment leases or other agreements evidencing outstanding loans to which the company is a party or was a party within the past two years.
- All material correspondence with lenders during the last three years, including all compliance reports submitted by the company or its accountants.
- List of major clients and their locations.
- Any other material contracts.
- Copies of any pleadings or correspondence for pending or prior lawsuits involving the Company or the Founders.
- Summary of disputes with suppliers, competitors, or customers.
- Settlement documentation.
- A management organization chart and biographical information.
- Correspondence, memoranda or notes concerning pending or threatened labor stoppage.
- Schedule of all compensation paid to officers, directors and key employees for most recent fiscal year showing separately salary, bonuses and non-cash compensation (i.e. use of cars, property, etc.).
- Summary of employee benefits and copies of any pension, profit sharing, deferred compensation and retirement plans.
- Summary of management incentive or bonus plans not included in above, as well as other non-cash forms of compensation.
- Description of all related party transactions which have occurred during the last three years (and any currently proposed transaction) and all agreements relating thereto.
- Audited financial statements since inception (unaudited if audited financials are unavailable).
- Quarterly income statements for the last two years and the current year (to date).
- Financial or operating budgets or projections.
- Business plan and other documents describing the current and/or expected business of the Company including all material marketing studies, consulting studies or reports prepared by the Company.
- A description of all changes in accounting methods or principles during the last three fiscal years.
- Any documents relating to material write-downs or write-offs other than in the ordinary course.
- Revenue, gross margin and average selling price by product or service.
- Aging schedules for accounts receivable for the last two years.
- Description of all contingent liabilities.
- List of real and material personal property owned by the Company.
- Documents of title, mortgages, deeds and agreements pertaining to the properties listed in (1) above.
- All outstanding leases with an original term greater than one year for real and personal property to which the Company is either a lessor or lessee.
- Documents pertaining to proprietary technology developed/owned by the Company, including any copyright or patent filings. This will also include information confirming that the Company’s systems, software and technology is owned solely by the Company and does not infringe on any other party’s rights.
- Any notice of assessment, revenue agents’ reports, etc. from Income tax, sales tax, service tax, excise or any other central or state authority.
- Income tax returns for the last three years.
- All acquisition, partnership or joint venture agreements.
- Documents pertaining to potential acquisitions or alliances.
- Any agreements regarding divestiture or assets.
- Material reports to Government agencies for past three years (e.g., SEBI, ROC, etc).
- Copies of all permits and licenses necessary to conduct the Company’s business.
- Summary of applicable central, state and local laws, rules and regulations.
- Press releases during the last two years.
- Articles and other pertinent marketing studies or reports relating to the Company or the industry.
- Information regarding competitors.
- Customer satisfaction surveys, if any.
- Current brochures and sales materials describing the Company’s services