The pROCess of research and analysis which takes place before an acquisition, investment, business partnership or even a bank loan for determining the value of the subject and whether it has any major issues involved with it, it is called Due Diligence. This judgment is then summarised in a report called the Due Diligence Report.
The due diligence pROCess includes the following:
It analyses the various aspects in order to check the commercial potential of the firm.
Due Diligence assesses the feasibility of the firm for all its assets and liabilities at the comprehensive level.
It examines the operations and verification of the material facts which are related to the entity regarding the proposed transaction
Types of Due Diligence
Due Diligence has the following three types, which must be known:
Business Due Diligence- This type of Due Diligence looks into the parties which are involved in the transaction pROCess and the prOSPects of the business. It also looks after the quality of the investment.
Legal Due Diligence- This type of Diligence is one which focuses on the legal aspects of a transaction, legal traps and other law-related issues. This type of Due Diligence looks after both inter-corporate transactions and the intra-corporate transactions. There are various regulatory checklists which form a part of this diligence in addition to the ones already existing.
Financial Due Diligence- Under this Diligence, all the financial, operational as well as the commercial assumptions come under this due diligence. This type of due diligence is a huge sigh of relief for the Company which acquires it. All the reviews of accounting policies, audit practices, tax compliances and internal controls are done under this.
Areas of Focus in a Due Diligence Report
These are the areas on which the Due Diligence focuses:
Viability: Due Diligence report accesses the viability of the target Company. This is done by an accurate study of the business and financial plans of the Company.
Monetary Aspect: The Key financial data and ratio analysis are necessary for the understanding of the complete picture of the firm
Environment: The report also looks into the macro environment and the impact it has on the Company.
Personnel: It looks at the credibility of the people who work in the Company and who are driving it.
Existing & Potential Liabilities: If there are any pending regulatory issues they are taken into consideration.
Technology: The technology which the entity uses it is also assessed under this Due Diligence. It is important as the future actions depend on it.
Effect of synergy: The synergy between the target Company and the existing Company helps in the decision making for the firm.