Due Diligence
Conducting due diligence is a crucial aspect of any merger and acquisition transaction, as it involves a comprehensive evaluation and analysis of a potential deal or investment opportunity. The process involves a thorough investigation and auditing of the target company’s books and status, with the aim of verifying all the facts and figures from various aspects. The main objective of due diligence is to confirm the accuracy of the claims made by the seller while offering the deal.
There could be various types of due diligence depending upon the nature and strength of the business such as :
Structure Of Joint Venture
While commonly referred to as partnerships, Joint Ventures can take on various legal structures, such as limited liability companies, partnerships, corporations, and private limited companies.
Joint Venture management consulting firms may be established to accomplish specific projects or transactions, or to pursue ongoing objectives. These partnerships can bring together entities of different sizes to work on small or large-scale projects and deals.
The Joint Venture agreement is the most critical document that governs the Joint Venture Strategic Alliance, irrespective of its legal structure. This agreement outlines the shareholders’ rights and obligations, objectives, business plan, initial investments, corporate governance, dispute resolution methods, profit and loss sharing mechanisms, and other relevant aspects of the Joint Venture.
Advantages of a Joint Venture
The involvement of investors/parties in a Joint Venture can lead to the introduction of novel products and services to their respective customer bases.
- Joint Venture can help to achieve operational efficiency and cost-saving
- Joint Venture can help parties save time
- Joint Venture can assist parties to acquire new customers and penetrate new geographies
- joint Venture can enable parties to gain new technology and know-how
Financial Due Diligenc
Financial Due Diligence is considered to be the most important type of due diligence, mainly because the valuation of the business is typically based on the financial statements. During this type of due diligence, the agency responsible for the investigation must verify whether the financial statements and other financial records presented by the seller accurately reflect the true value of the business.This engagement involves conducting comprehensive and thorough tests on past audited financial statements, current unaudited financial statements, and projected financial statements. The figures before and after the deal are compared, and all figures reported in the financial statements, such as deposits, advances, debtors, creditors, loans, guarantees, fixed assets, current assets, bank balances, etc. are extensively tested.
Tax Due Diligence
Tax Due Diligence is also a significant type of due diligence, particularly in countries such as India where multiple tax laws apply to every business. During tax due diligence, experts evaluate the reporting of incomes and expenses to various tax authorities, both direct and indirect, to ensure that the income has not been under-reported and the expenses have not been over-reported to reduce the tax liability.In addition, reconciliations of incomes and expenses are done to ensure that the same reporting has been done to different authorities, including indirect tax authorities, direct tax authorities, ROC, DGFT, etc. Additionally, experts assess the current status and exposure of the company due to any pending tax disputes, assessments, departmental audits, scrutiny, or other relevant factors
Legal Due Diligence
Legal Due Diligence is essential before putting the hands-on on any business. A team of legal experts evaluates the risks that may arise on account of any business contracts, representations, warranties, share purchase agreements, loan agreements, customer contracts among other things. Various legal documents of the company such as Memorandum of Association (MOA), Articles of Association (AOA), Minutes of Board Meetings, etc. are also reviewed before giving an opinion on the legal risks attached to the business including any contingent liabilities for Legal due diligence.
Other Areas of Due Diligence
Due diligence is a crucial process in mergers and acquisitions, which involves the examination and analysis of the target company's books, records, and other aspects to verify the accuracy of the claims made by the seller. Apart from financial and tax due diligence, other areas of due diligence, such as technical, human resources, environmental, and intellectual property, are also evaluated. Legal due diligence is another critical aspect, where a team of legal experts examines the legal documents of the company and evaluates the risks attached to the business, including any contingent liabilities. Due diligence is also conducted by banks before disbursing loans, investees before pitching their business to investors, and promoters before selling their business to understand its actual value. The report generated from due diligence provides insights to the acquirer, which is critical for decision-making.
