What is Due Diligence?

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.

Objectives of Due Diligence

• To assess legal and potential pitfalls of the transaction
• To know the positives and negatives of the transaction
• To uncover hidden liabilities of the organisation
• To stand in a better bargaining position
• To evaluate financial aspects of the transaction
• To identify strengths and weaknesses of the business
• To ensure complete and adequate disclosures
• To enhance stakeholders’ confidence

Transactions Requiring Due Diligence

Due diligence is crucial for every business deal, but especially for:

• Merger and Amalgamation
• Partnership
• Joint Venture & Collaborations
• Public Offer

Scope of Due Diligence

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.

Types of Due Diligence

Documents Reviewed in Due Diligence

• Basic Company Information & Charter Documents
• Financial Statements & Tax Records
• Business Agreements & Contracts
• Litigation Details
• IPR Records
• HR & Insurance Information
• Environmental & Cultural Aspects

Stages of Due Diligence

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.

Data Room in Due Diligence

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.

Conclusion

Due diligence is a must for any business transaction. It helps avoid risks, uncover hidden liabilities, and ensures informed decision-making for successful deals.