Business Due Diligence

Business Due Diligence

Business alliances and partnerships should be established only after obtaining all the information related to investment, vendor, partner etc. Hence, the need for ‘Business Due Diligence’ – a business discipline used to identify and mitigate operational, financial due diligence, Vendor Due Diligence and security risks associated with business entities before a possible alliance. Organisations should have a business due diligence checklist for quick evaluation before investing in any partnership. Business due diligence checklists should be prepared with the context in place and in consultation with an expert.
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Business Due Diligence- More Information

Business due diligence is an indispensable step before collaborating with another business party. It is the due diligence carried out at the behest of, the seller, by independent third parties.

While due diligence can be conducted in-house using the web and some standard tools available online, critical business relationships should be screened through expert agencies and consultants before taking decisions.
Using web and readily available tools, one can access information available on the Ministry of Corporate Affairs (MCA) website and other relevant sources. However, information from such sources is not easy to understand. Connecting the dots and creating meaningful insights by interpreting this sea of information is not easy! This is where experts come into the picture. Due diligence when buying a business is critical and needs expert supervision.

Outsourcing assignments to business due diligence experts can save a lot of valuable time and effort of an organisation while getting access to unbiased, comprehensive insights about the business entity being probed. Not only does it save time and money, it also uncovers areas, information on which would be otherwise difficult to obtain, thereby, ensuring better decision making using comprehensive research. The results are delivered in an easy to understand format.

Outsourcing vendors have necessary domain expertise and are adept with the evolving fraud practices and trends in the marketplace- across various industries. They have years of experience and the necessary skill set to uncover the minutest of the fraud elements associated with your case. And all this comes to a business at reasonable cost compared to investing one’s own manpower.

Businesses should ensure that they consider the context of the transaction and decide the scope of the due diligence process in line with the business objective. A quick cost benefit analysis can then help them in identifying if they need to conduct it themselves or outsource.
More critical the business activity and more the risk associated with the transaction, more critical is the business due diligence process. In such cases, outsourcing to expert due diligence agencies is highly recommended.

Due Diligence is hence, a necessary risk mitigation practice.

Organisations partner with other business entities for maximizing profits and for ensuring long run business sustainability. When it comes to SMEs, vendors become crucial for business continuity. With more organisations taking the outsourcing route, business alliances become critical success and differentiating factors.

A business should obtain a complete 360-degree overview of the prospective business vendor’s financials, reputation and business model before collaboration, according to the context. Due diligence checklists become a primary concern in this regard. The following should be followed as a due diligence checklist for small businesses-

  • Company Vitals- Registration details, existence, location etc.
  • Financial Information- Credit, health, financial statements etc.
  • People- Directors, Management and employees
  • Reputation- Clientele, Feedback, Media Mentions and News
  • Legal & Compliance Information
  • Tax related due diligence

Business Due Diligence- Process & Reports

Business Due Diligence process is a long-term investment; it is a risk mitigation best practice with intangible benefits to your company brand and financials. Here’s why you should conduct a due diligence process at your end:

1) Business due diligence ensures that the transaction process is low in risk & provides a better overview of the course of the transaction. By providing information regarding a company’s financial and business related information, this process flags off any potential issues that may arise during the course of the transaction.

2) It consults the seller with negotiations related information during the business transaction. This puts the evaluator in a much better position, with much better information about the real picture and possible drawbacks.

3) It ensures that the prospective entity is a legally compliant company and that they adhere to standards set by regulatory bodies. By adopting the process of business due diligence, businesses are assured of the fact that they are entering into a business relationship with a company which does not have any record of compliance breach. For example, compliance to US FCPA, UK Bribery Act, Indian Prevention of money laundering Act etc. is mandatory for every organisation to thrive in a global environment.

4) Due diligence of target company provides a green flag on the authenticity of the claims made by the organisation. Ignoring the due diligence process can be fatal; you may end up in a storm of discrepant information and dressed financials.

5) Regular tab on the business’ mode of operations helps in prevention of situations where the other business entity gets involved in unfair and unethical practices in course of the transaction. This may impact the business venture/deal directly. Due Diligence processes tackle such unforeseen possibilities with ease.

6) Identify relevant issues/areas of scrutiny with the partner/business that must be cleared before any settlement is agreed upon & to spot issues that could be turn out to be deal breakers
This process of due diligence becomes particularly important in the face of digital revolution that has brought in massive disruption with technology consistently advancing over the years. A wave of rising start-ups is leading to a paradigm shift in how businesses are collaborating to win customers and grow faster!

Investors intending to infuse funds into start-ups need to conduct a thorough screening of the prospective business model, associated people and business financials. Similarly start-ups need to conduct thorough due diligence on their stakeholders, be it investors, agencies, third party vendors and partners, etc. to clearly gauge their capabilities and competencies. A deep dive analysis is inevitable for budding organizations especially, while they seek debt and equity financing. Hence, due diligence is important on both sides of the table.
Even financial institutions are bound by KYC (know your customer) regulations. Similarly, businesses should know their employees, partners and other stakeholders- who is investing, why are they investing, who are they, how they earned their money, what is their risk attitude and appetite and other such valuable points.

With the growing frauds by external as well as internal stakeholders and the increasing regulatory watch on investments, due diligence process ensures repute and risk mitigation.

In all, Vendor Due Diligence should not be overlooked.

Due Diligence Reports are created after a thorough evaluation of various aspects of a business entity. This includes:

• Financial details including the overall financial profile, stability and legal problems
• Directors
• Credit ratings
• Legal or regulatory compliance
• Charges
• Shareholding patterns
• Financial details
• Trademarks
• Related companies
• Database & media checks
• Documents
• Organizational capacity, operating procedures
• Organizational structure
• Data security systems
• Building or personnel security
• Insurance coverages

The process of creating a business due diligence report starts with finalizing the scope of the research and the areas to be covered in the report. The abovementioned areas are a representative sample of the areas which can be assessed with business due diligence. Using online information from various sources and some readily available tools, information is gathered in one place. This information is then analyzed to identify trends/ patterns and relevant insights are filtered to draw inferences.

The relevant areas as discussed in the scope are listed and inferences are quoted along with supporting evidences. The dots are connected to deliver an accurate overall view of the organisation.

The report is presented to be easy to understand, free from technical and jargon-based vocabulary.

Business Due Diligence- FAQs

Business due diligence process refers to the investigation of a business’s operations, financial performance, legal and tax compliance, customer contracts, intellectual property, assets and other details, before making a business transaction/alliance. May it be due diligence for buying a business, partnering with a vendor, monitoring transactions post investment or critical business calls like giving out Franchise Rights, business due diligence needs to be performed to mitigate third party risks and protect brand and company financials.

A due diligence checklist is the set of parameters which needs to be evaluated as a part of business due diligence before signing off an alliance/partnership. Due Diligence checklist should definitely include reviewing the company’s operations, financials, legal, compliance, tax, people and customers.

Business due diligence process is a step by step process of evaluating a business model and its associated factors- operations, financials, compliance, legal, tax, people, shareholdings, credit, media reputation and other factors that make a difference to your investment/alliance decision.

A business due diligence report consists of an objective evaluation of the target’s business model, its operations, financials and multiple other parameters. Inferences are drawn based on evidences drawn out of the MCA (Ministry of Corporate Affairs) website or equivalent sources.
The inferences along with the supporting evidences are compiled along with recommendations and presented in a business due diligence report.