In this article “Understanding Due Diligence” we are going to delve into the intricacies of the process of Due Diligence.
Due Diligence is the process of checking of a list of documents( for example, finance documents, legal documents, HR documents etc.) by the buyer. The buyer usually sends a request to the seller to provide him with a list of documents(like finance documents, legal documents etc.). After receiving the documents from the seller, these documents will be checked thoroughly by the buyer to make sure that he is buying a valuable business.
Seller Side Due Diligence :
The seller retrieves documents and relevant information of the company and provides it to the buyer.
Buyer Side Due Diligence:
The buyer will analyze the documents (provided by the seller) thoroughly. The majority of the due diligence will revolve around the company’s financials. While analyzing the buyer keeps an eye out for potential risks. If the business turns out to be a valuable business with no red flags, the buyer goes ahead with the M&A process.
Typical documents checked in due diligence:
1. Financial Information: Balance Sheets, Income Statements, Tax returns, Information related to any debt etc.
2. Company Information: Information on ownership, information on stockholder, overview of major competitors etc.
3. Product Information: List of products, predicted growth rates etc.
4. Customer Information: Information on customers, customer communication practices.
5. Legal Information: All licensing information, insurance information etc.
6. Intellectual Property Information: Information on patenting, information on the ownership of IP etc.
Hence we can say that the goal of due diligence is to maximize the chances of buying a valuable business.
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