Due Diligence is a process that is undertaken by businesses before making a crucial business decision. Due diligence is an evaluation or an audit of an investment or product that is undertaken to confirm that all the information and details mentioned are true and correct. Due Diligence services are performed by companies as well as businesses to evaluate and examine different aspects before taking business decisions. It refers to the research that takes place before signing up an agreement or a financial transaction with another party.
Objectives of Due Diligence
- To assess the financially stability of the business,
- To ensure that the business is legally sound,
- To ensure that the company has a consistent amount of stability,
- To ensure that all the significant facts of the company are transparent
- To help in minimizing the chances of acquiring liabilities or taking risks because appropriate investigation will bring out accurate results.
- The due diligence process identifies current issues or problems that might exist in the business that might further grow into larger issues. These problems have the probability of giving rise to huge liabilities at later stages of the business.
- Helps in the regulation and identification of the value of the business and negotiates the adequate price.
How are Due Diligence services performed
Due diligence process involves reviewing the mandatory due diligence checklist points of the following key areas. The process of carrying out the process is mentioned as below –
- Preparation of a Non-Disclosure Agreement
Preparing a non-disclosure agreement (NDA) is the first step in the due diligence process that takes place between two parties associated in which the terms and conditions of the business due diligence are mentioned.
- Operational Due Diligence
This step consists of collecting significantdetails regarding the situation. The team later studies the information and examines documents related to operations conducted in the business.
- Financial Due Diligence
The due diligent company, then places their questions and further reviews documents on subjects related to the target company’s last three years’ financial statements, and verifies if the statements are audited or not. The other questions that they check upon are whether the profit margins are increasing or decreasing and at what rate, what are the company’s future projects, if the assumptions are reasonable, working capital requirements needed to continue the operations of the company,
- Legal due diligence
The legal due diligence company reviews all relevant legal and regulatory documents of the target company and interviews important people. The purpose is to check all legal risks. Documents affecting to registrations, compliances, intellectual property rights, litigations are evaluated in details.
The last step comprises preparing the report or putting together the results of the business due diligence process which is later shared with both the parties.
How are Due Diligence Services classified
The services that take place by various businesses are categorized into various types which are discussed as below –
- Human Resources
- Strategic Fit
Due Diligence Requirements
- Evaluate the details and information provided by the client
- Filing and submission of the Form
- Asking appropriate questions
Undertaking due diligence services is an essential process that is often neglected by businesses. The corporation, whether small or large, must make it a practice to undertake due diligence. If the process is executed in an effective manner, it can help businesses save up from huge losses.
Also. read: Due Diligence Reports on Banks