“Due diligence” is an analysis and risk assessment of an impending business transaction. It is the careful and methodological investigation of a business or persons, or the performance of an act with a certain standard of care to ensure that information is accurate, and to uncover information that may affect the outcome of the transaction.
Due diligence report should provide information and insight on aspects such as the risks of a transaction, the value at which a transaction should be undertaken, the warranties and indemnities that needs be obtained from the vendor etc.
Scope
The investigation or inspection would cover: — Compliance with applicable laws — Regulatory violations or disciplinary actions — Litigation and assessment of feasibility of pursuing litigation — Financial statements — Assets – real and intellectual property, brand value etc. — Unpaid tax liens and/or judgements — Past business failures and consequential debt — Exaggerated credentials/Fraudulent claims — Misrepresentations or character issues — Cross-border issues – double taxation, foreign exchange fluctuation, sovereign risk, investment climate, cultural aspects. — Reputation, goodwill and other intangible assets.
Types of Due diligence
The most important types of Due Diligence are:
- Business Due Diligence (i) Operational due diligence (ii) Strategic due diligence (iii) Technical due diligence (iv) Environmental due diligence (v) Human Resource Due diligence (vi) Information Security due diligence (vii) Ethical Due Diligence
- Legal Due Diligence (including secretarial due diligence)
- Financial Due Diligence (including tax due diligence).
Documents To Be Checked In Due Diligence Process
The following are the few types of information or documents to be checked, during the process of due diligence.
- Basic information
- Financial Data
- Important business Agreements
- Litigation aspects
- IPR Details
- Marketing information
- Internal control system
- Taxation aspects
- Insurance coverage
- Human resources aspects
- Environmental impact
- Cultural aspects
However, the list mentioned above is not an exhaustive. The purpose of providing this list is to provide a general idea of documents that are required to be checked in any type of due diligence.