Due diligence is a method of research and analysis which is initiated before any purchase, investment, business firm or bank loan, for determining the value of subject associated to due diligence or whether further there are any other major challenges associated to it. Such conclusions are then concise in a report which is known to be the due diligence report.
Due diligence is a study or audit of a possible investment or product to confirm all facts, that might include the review of financial records. Due diligence also discusses to the study done before arriving into an agreement or a financial transaction with another party.
Investors perform due diligence before buying a security from the organizations. Due diligence can also refer to the enquiry in where a seller performs on buyer which might include details related to buyer having adequate resources to complete the purchase.
Due dalliance report assess the financial sustainability for the entities in terms of assets & liabilities with a comprehensive level. It also analyzes the operations and authenticating with the material facts related to entity in reference to proposed transaction.
Some of key Transactions Enclosed for Due Diligence
Mergers and Acquisitions: Due diligence for the mergers and acquisitions to be done from seller as well as buyer. While buyer also looks for the financials, litigation, patents apart from the entire range of applicable evidence, the seller emphases on related to buyer, the financial skills for completing the transaction and ability to fulfil commitments.
Partnership: Due diligence is done for the strategic alliances, partnerships, coalitions and any other partnerships.
Joint Venture And Collaborations: When one company joins other considering the reputation and measuring the adequacy of resources at their end assumes importance.
Need for a Due Diligence Report: The information collected during this process is crucial for decision making and hence should be reported.
The Due Diligence report helps to understand how company plans to generate additional earnings. It also serves a ready reckoner for understanding the affairs during purchase/sale, etc. The ultimate purpose is to get a clear picture of how business will accomplish in the future.
Areas of Focus in a Due Diligence Report:
Viability: Retrieving the viability of the target company that can be done through a thorough study of business and financial plans.
Monetary Aspect: Key financial data and a ratio analysis make it necessary to understand the picture
Types of Due Diligence:
Business Due Diligence:
It involves considering into the business involved in the transaction, predictions of the business and the quality of investment.
Legal Due Diligence:
It mainly emphases on the legal aspects of a transaction, legal pitfalls and other law related issues. It includes both corporate to corporate transactions as well as within corporate transactions. Different regulatory specifications form a part of this diligence along with the previously surviving documentation.
Financial Due Diligence:
Financial, operational and commercial assumptions are validated here. This provides enormous sigh of assistance to the buying company. Review of accounting policies, audit practices, tax compliances and internal controls are also done.
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Ankur Gupta, Head Marketing & Communications