In India, for buying, selling or investing in a business we come across with the term ‘due diligence’. In order to ascertain the true worth of a business, investigation or depth analysis I did. Before buying a business certain things are considered such as the location of the business, and check whether there is any legal issue involved which may land buyer in trouble. Hence before buying a business due-diligence is a must. Before buying a business various aspects of due-diligence are considered.
Types of Due-Diligence
- It starts with evaluating the type and size of business;
- Nature of ownership;
- The position of the business and;
- Products and services with respect to the market;
- Profile of the seller, relationships with suppliers and other channel members;
- Quality of the existing staff, the status of existing leases (in case if any).
- To evaluate the financial health of the business, it is better to seek the assistance of an accountant.
- The request is made for audited financial statements of the business for at least the last three years and if applicable then provisional financial statements for the ongoing year.
- Evaluate the profitability, net worth, cost structure, debt-equity allocation, asset utilization, current ratio, and any major outstanding liabilities.
- Financial projections for the next three to five years and ascertain the future potential of the business in an objective manner.
- Evaluate the core technology elements in the business;
- The efficiency of technology used in the business;
- Evaluate whether it can be easily extended to match with future technology;
- Check the licenses and patents for any technological innovation carried out by the business;
- To verify whether there is adequate infrastructure to support the current and future technology.
- In case the business has been served any legal notices then look for legal matters of concern, and to get to know about the present status of such notices;
- Tax compliance of the business;
- Ownership disputes on ownership of the business, any ongoing or past litigations;
- Safety aspects of plant and factory, if any, and so on.
- For a buyer, the best time to conduct due diligence is after shortlisting maximum of 2 businesses, which matches criteria to the maximum possible extent. The perfect time to take the deal forward and conduct due-diligence to investigate after satisfying the overall initial assessment of the business.
Reasons for Conducting Due-Diligence
Here are the following reasons for conducting due-diligence:
- It helps in verifying the issues or concerns in a business which can affect the purchase decision.
- It helps in gathering inputs which are required to carry out an objective valuation of the business.
- It is important for managing the future transition in a better and smoother way.
- For conducting due diligence the best way is to have in place a cross-functional team consisting of an accountant, a lawyer, a tax advisor, and a business analyst.
- Create a checklist of documents which are required from the business owner.
- On a regular basis, tracking of the receipt of such documents.
- Prepare a list of all the questions for which clarification is required, and periodically share these with the seller.
- Keep addressing issues in a timely manner.
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