Checklist for Due Diligence of a Company

Due diligence is important in a transaction process. In case of an acquisition business, the target business will become a part of the acquirer and the acquirer will absorb all assets and liabilities of the target.
Ankita Bohidar
March 16, 2021

Due diligence is one of the most important parts of M&A, private equity or venture capital investments. In the case of term loans from banks also due diligence is the step that always comes before the deal is closed. Due diligence is a very detailed process of understanding the target of a particular business.

Due diligence of a company is generally performed before the business sale, private equity investment, bank loan funding etc. In the due diligence process, the finance and legal aspects of a company are usually reviewed and documented.

Business due diligence

A business due diligence is generally carried out while conducting a purchase of a company or while investing in a company by the acquirer or investor. The responsibility lies on the seller of the business or shares to provide all the necessary documents and information to conduct due diligence on the company to the buyer. The process of due diligence helps the buyer in making an informed investment decision and mitigate all the risks that might be involved with a business purchase transaction. Prior to starting a business due diligence both the parties enter into a non-disclosure agreement with respect to sensitive financial issues, operations, legal and regulatory information etc.

Documents required for performing due diligence

  1. Memorandum of Association
  2. Operational records
  3. Statutory Registers
  4. Property Documents
  5. Intellectual Property Registration or Application Documents
  6. Utility Bills
  7. Tax Registration Certificates
  8. Articles of Association
  9. Shareholding Pattern
  10. Certificate of incorporation
  11. Bank Statements
  12. Employee Records
  13. Tax Registration Certificates
  14. Income Tax Returns

Review of MCA Documents

Most of the due diligence of a company starts with the MCA i.e Ministry of Corporate Affairs. The master data about a company is made available to the public in this MCA website. Next, with minimal fee payment, all the documents that are filed with the registrar of Companies are made available to anyone and everyone. Generally, this information on the MCA website is verified first.

Review of Articles of Association

It is quite important to review the articles of association of a company in order to ascertain different classes of equity shares and their voting rights during the due diligence process. Articles of association of a company can restrict the transfer of shares of a company. Hence it is advisable that the articles of association should be studied carefully in order to ascertain the procedure for transfer of shares.

Review of Statutory Registers of Company

According to the Companies Act, 2013 a private limited company requires to maintain various statutory registers with respect to share allotment, share transfer, board meetings, the board of directors etc. Hence it is said that a company must be reviewed to obtain as well as validate information pertaining to directorship and shareholding.

Review of Financial Statements

According to the Companies Act, 2013 it is mandatory for all the companies to maintain the books of accounts as well as detailed information of financial transactions.

· Verification of bank statements

· Verification of valuation of all the assets and liabilities

· Verification of cash flow information

· Verification of all financial statements against transactional information

Review of Taxation Aspects

It is important to check all the taxation aspects of a company very thoroughly during the due diligence process in order to ensure that there no unforeseen taxation liability of a company in the nearing future.

Taxation aspects include: Income tax return to be filed, income tax liability by the company must be calculated, service tax payments and returns must have been filed, TDS returns, payments and calculation must be carried out.

Review of Legal Aspects

Legal aspects of the company have to checked and complied thoroughly as mentioned under the statute. A comprehensive legal audit of the company must be performed by a legal representative to make sure that there is no more pending legal actions, suits by or against the company and liability that might arise.

Review of Operational Aspects

It is important to understand the business model, business operations and operational information during the due diligence process, thoroughly. The review of operational aspects must be extensive and shall include all the site visits and employee interviews etc.

Conclusion

Due diligence is important in a transaction process. In case of an acquisition business, the target business will become a part of the acquirer and the acquirer will absorb all assets and liabilities of the target. Hence it is important that the acquirer shall develop an in-depth perceptive of the target. The acquirer must know what he is dealing with and whether it is worth making an acquisition.

In the case of due diligence, a checklist facilitates the process. A checklist can be defined as a tool to gauge the process. It defines the scope of the task at hand and allows the team members to verify their progress in the process. The checklist helps them to identify the quick wins and the difficult areas of the due diligence so that they can take appropriate steps.

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