Due diligence is the process by which confidential, financial, legal and other material information is exchanged, reviewed, and appraised by the parties to a business transaction before entering into it. It helps in assessing both positive and negative aspects of the transaction to take informed decisions.
Due diligence is crucial for every business deal, but especially for:
The scope of due diligence depends upon transaction to transaction. Due diligence is wider in scope as compared to audit. While performing due diligence one must be aware of the objective for which he is undertaking due diligence process. Due diligence is generally understood by the legal, financial and business potentials with respect to various disclosures as to assets and liabilities, intellectual property rights, pending litigations against the target company, various tax related matters of the target company. Thus, due diligence process has to be done according to the transactions to be entered into with the objective in mind.
Examines quality of the transaction, operational aspects, and strategy.
Assesses technology used, IPR ownership, and risks of infringement.
Evaluates environmental impact, risks, employees, and cultural issues.
Reviews compliance, contracts, audits, earnings, and cash flows.
Pre-Diligence: Preparation, signing NDAs, collecting documents, creating data room.
Diligence: Review documents, prepare diligence report (Deal Breakers, Diluters, Cautioners, Makers).
Post-Diligence: Rectify non-compliances, file petitions, negotiate agreements.
A Data Room stores confidential documents like trade secrets, IPR, financial data, and litigation papers. It can be Physical or Virtual, with Virtual being cost-effective and accessible 24×7.
Due diligence is a must for any business transaction. It helps avoid risks, uncover hidden liabilities, and ensures informed decision-making for successful deals.
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