Due diligence is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all facts, financial information, and to verify anything else that was brought up during an M&A deal or investment process. Due diligence is completed before a deal closes to provide the buyer with an assurance of what they’re getting.
Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision makers.
From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that his or her expectations regarding the transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence substantially increases the risk to the purchaser.
From a seller’s perspective
Due diligence is conducted to provide the purchaser with trust. However, due diligence may also benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the fair market value of the seller is more than what was initially thought to be the case. Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to potential transactions.
Costs of Due Diligence
The costs of undergoing a due diligence process depend on the scope and duration of the effort, which depends heavily on the complexity of the target company. Costs associated with due diligence are an easily justifiable expense compared to the risks associated with failing to conduct due diligence.
Advantages of Private Limited Company
How can Startup Movers assist you in Due Diligence?
- To Check & Review whether requisite necessary documents as called for are on record
- To Check & Review whether the documents on record are correct and as per norms
- To check & Review whether the company is able to maintain the standards of documentation as per desirable norms and practices
- To Check & review the past financial statements with a view to make note of any shortcomings & check if the reporting is as per reporting standards & framework
- To check & conduct a GP/NP Analysis for readers of the DD Report
- To check & review on a sample basis the accuracy of sales reported, verification with statutory returns filed, books & sale bill verification
- To check & review on a sample basis major voucher of expenditure, revenue & addition to major fixed assets
- To review the auditors’ report and make note of any remarks/comments
- To review the working capital positions and make relevant analysis required, including inventory verification on a sample basis, WIP in production
- To Check & review the provisional unaudited provisional financial results and compare them with historical performance to make note of any gaps & major developments
- To check & review the material transactions affecting overall business
- To check whether the business activities are as per the main objects of LLP agreement
- To Check & review whether the company has obtained the applicable business registrations, any renewals if pending
- To Check & review whether following filings applicable to the company has been done or not:
- Applicable ROC Filings –Annual or Per event wise
- GST Return Filings – Returns & Tax Payments
- Income Tax Filings –Returns & Tax Payments
- TDS Return Filings –Returns & Tax Payments
- PF Return Filings – Return Cum Tax Payments
- ESI Return Filings – Return cum Tax Payments
- To Check on sample basis the accuracy of Statutory return computationsTo Check & review any delays, interests, late fees and penalties in return filing/tax payment
- To check the reporting in Tax Audit Report/MAT Report
- To Check the management response and compliance of Auditor’s remarks & comments
- To Check the assessment orders passed if any under Income Tax/ VAT/GST & make note of any contingent liabilities likely to have an impact
- To check for pending litigations & exposures likely to have an impactTo Check the overall compliance of statutory framework with respect to required documentation & internal legal housekeeping for respective statutes
- To check on sample basis the internal control policies\
- To check on sample basis the debtor & vendor selection policy
- To check on sample basis the propriety functional policy\
- To check on sample the action policy on upkeep & safeguard of assets of the company
- To check whether the business activity of the company with its MOA
- To check the Company has taken all the declarations from its Directors under section 184 and 164 of Companies Act, 2013
- To check if the company is maintaining its business as per regulation prescribed under AOA
- Whether the company has its common seal or not as per its AOA
- Whether the company issued share certificate to all its shareholders within the time prescribed under law
- Validating company records with MCA filings
- Validating the capital with Form SH-7 and PAS-3 filed to ROC
- Checking online record of the company for RBI filing in case of foreign investor, if any and validating the pendency of the matter, if not approved by RBI
- Checking of correctness of the annual forms filed to ROC, any delay or gaps in filings
- Whether the company has followed the terms of the SHA/SSA executed with previous investor
- Whether the company has complied all the post-closing terms like issuance of share certificates, payment of stamp duty etc.
- Whether the company is providing all material information to the investors as per SHA
- Whether all major agreements having material effect on the company have been executed by appropriate authorities
- Checking whether the Company is maintaining timely statutory registers or not as per Companies Act, 2013
- Checking Board Meeting Minutes, whether secretarial standard has been followed while maintaining the minutes of meetings
- Checking whether the details of shareholders of the company available at MCA is same with company records
- Checking whether the Company has maintained employment agreement with his employees
- Checking whether the Company has executed any ESOP or ESOS policy for its employees and if yes, whether the compliance for the same has been completed or not.
- Checking whether the company has applied for any trademark or any other IPR
- If applied, whether it has been registered or not and the reason of pendency, if any