Overview of Company Due Diligence
Company Due Diligence (“DD”) means an examination or an appraisal of a body corporate to get an idea of its assets and liabilities so that the commercial value of the entity can be ascertained. It is important, especially from the point of view of investors or purchaser, as they would want to know if it is safe to invest in a particular entity. Due diligence showcases reasonable care on the part of the individual/organization that is looking forward to invest or entering into an agreement with the other party.
Company Due diligence is done on the basis of the business market, revenue, margin trends and industry of which the organization is a part. This makes the ascertainment of the actual value of the organization easier as a fair comparison with other organizations in the same market can be made.
Aspects of DD:
Due diligence of a Company would include the assessment of its business activities in order to ascertain its assets and liabilities for estimating its commercial potential.
Any investor planning on making investment in a Company would undertake a comprehensive appraisal of the same to be assured of the decision of investment on every aspect. The due diligence that the investors undertakes is of four types:
1. Legal Due Diligence
This involves the scrutiny of the legal basis of all the transactions of the Company which includes contracts, property, loans, impending litigations and cases, employment, potential liabilities to assess legal risk and overall legal structure. It would take into consideration the following matters:
If the Company has been incorporated correctly under the applicable laws;
1.1. If the various compliances such as filing of returns, maintenance of accounts, etc. are being made;
1.2. If there are any impending cases of the Company in a Court of Law;
1.3. If legal status of the company in relation to its assets and liabilities;
1.4. Such other related legal matters.
2. Financial Due Diligence
This involves examination of the financial information of the Company, which includes information pertaining to the assets, liabilities, debts, cash flow, management, capital, etc. It would mainly include:
2.1. Accuracy and genuineness with which the accounts of the company are maintained;
2.2. Credibility and creditworthiness of the company;
2.3. Overall financial soundness of the company.
3. Commercial Due Diligence
This involves the evaluation of the Company as a unit of the business market of which it is a part. This includes a careful perusal of the competitors, customer relationship, business plan, expected sales, strategies taken by the company, popularity of business, etc. The analysis would include:
3.1 How well the Company in comparison with its competitors as per the market conditions;
3.2 The relationship of the Company with its customers;
3.3 Goodwill of the Company;
3.4 Marketing and sales strategies undertaken by the Company in a certain period;
3.5 Expected chances of growth of the Company.
4. Taxation and Technical Due Diligence:
4.1. Income Tax;
4.2. Calculation of income tax liability by the company
4.3. ESI;
4.4. Provident Fund;
4.5. Goods and Service Tax;
4.6. TDS Returns;
5. Company Law Compliances:
5.1 Statutory Registers
5.2 Minutes Book
5.3 Secretarial Compliances
5.4 Compliance as per Ministry of Corporate Affairs
5. Other (Miscellaneous) Due Diligence
This includes due diligence of other vital components that form part of a Company such as Taxation, Intellectual Property, Information Technology System Labour Laws, Organizational Structure of the Company, hierarchy system of management, communication channels followed by the organization, etc. It is apparent that due diligence of a Company would be a 360-degrees perusal of its performance in all the aspects- legal, financial, commercial and other things related to its working. Due diligence gives the investors a fair idea of where a Company stands from different point of views so that they can make a fair judgment on the decision of investment.
6. Collecting the Relevant Information pertaining to a Company
It is vital that the information collected in the process of due diligence is reliable and accurate. The source collecting information during due diligence should be dependable as the decision of investment is based on it. The information is mostly gathered from the financials of the company, market data, business news and directors of the company.
CONTACT INFORMATION
Ladda Bhutada & Associates | 360 CompanyBecho Private Limited
- CS IP: Pramodkumar Ladda
- Address: Office No. 10, No. 55, Sukhniwas, 15 August Chowk, Mangalwar Peth, Pune – 411011
- Office Cell: +9199220 724607, 93098 45448
- Email: info@csladda.com
