Home Due diligence of Business and Companies
One of the most important and lengthy processes in an M&A deal is Due Diligence. The process of due diligence is something that the buyer conducts to confirm the accuracy of the seller’s claims. A potential M&A deal involves several types of due diligence.
Administrative DD is the aspect of due diligence that involves verifying admin-related items such as facilities, occupancy rate, number of workstations, etc. The idea of doing due diligence is to verify the various facilities owned or occupied by the seller and determine whether all operational costs are captured in the financials or not. Admin DD also gives a better picture of the kind of operational cost the buyer is likely to incur if they plan to pursue expansion of the target company.
One of the most important types of due diligence is the financial due diligence that seeks to check whether the financials showcased in the Confidentiality Information Memorandum (CIM) are accurate or not. Financial DD aims to provide a thorough understanding of all the company’s financials, including, but not restricted to, audited financial statements for the last three years, recent unaudited financial statements with comparable statements of the last year, the company’s projections and the basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc. The financial due diligence process also involves analysis of major customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of internal control procedures. Financial DD additionally examines the company’s order book and sales pipeline in order to create better (more accurate) projections.
Another type of due diligence conducted is asset DD. Asset due diligence reports typically include a detailed schedule of fixed assets and their locations (if possible, physical verification should be done), all lease agreements for equipment, a schedule of sales and purchases of major capital equipment during the last three to five years, real estate deeds, mortgages, title policies, and use permits.
Human resources due diligence is extensive. It may include all of the following
Analysis of total employees, including current positions, vacancies, due for retirement, and serving notice period
Analysis of current salaries, bonuses paid during the last three years, and years of service
All employment contracts, with nondisclosure, non-solicitation, and non-competition agreements between the company and its employees. In case there are a few irregularities regarding the general contracts, any questions or issues need to be clarified
HR policies regarding annual leave, sick leave, and other forms of leave are reviewed
Analysis of employee problems, such as alleged wrongful termination, harassment, discrimination, and any legal cases pending with current or former employees
Potential financial impact of any current labor disputes, requests for arbitration, or grievance procedures pending
A list and description of all employee health benefits and welfare insurance policies or self-funded arrangements
ESOPs and schedule of grants
Due diligence in regard to tax liability includes a review of all taxes the company is required to pay and ensuring their proper calculation with no intention of under-reporting of taxes. Additionally, verify the status of any tax-related case pending with the tax authorities. Documentation of tax compliance and potential issues typically includes verification and review of the following:
Copies of all tax returns – including income tax, withholding, and sales tax – for the past three to five years
Information relating to any past or pending tax audits of the company
Any important, out-of-the-ordinary correspondence with tax agencies
Almost every company has intellectual property assets that they can use to monetize their business. These intangible assets are something that differentiates their products and services from their competitors. They may often comprise some of the company’s most valuable assets. A few of the items that need to be looked at in a due diligence review are:
Schedule of patents and patent applications
Schedule of copyrights, trademarks, and brand names
Pending patents clearance documents
Any pending claims case by or against the company in regard to violation of intellectual property
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