Are you looking forward to buying a business entity? Check this article to learn about financial due diligence to avoid any loss.
How is Financial Due Diligence Performed in India
Every country has its procedure for performing financial due diligence. To perform financial due diligence in India, buyers must comply with some M&A guidelines prescribed by some statutes, including the RBI Act, Banking Act, and Income Tax Act. Some of the procedures for performing due diligence have been discussed below:
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Conduct Transactions
A third party is involved in the process of performing due diligence. The third party is a team of consultants, including company secretaries, accountants, lawyers, and IT professionals. The first step of due diligence is collecting the information related to the company’s financial background, which is offered for sale. Once the collection of financial data is over, data analysis takes place.
Employees who are involved in the due diligence process have to undergo training. Due diligence questionnaire is also created, and it will be shared with the seller to retrieve the essential financial data.
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To Manage Data
After the collection, information is distributed amongst the various departments of the selling company. Due to technological innovation, data is stored electronically in the present day. After data collection, these are stored in the places where data is stored normally. The diligence provider takes care of the data exchanged so that no discrepancies are found.
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Inspection of Data
In this process, data is checked to learn the accuracy. Many authorities, including the Security Exchange Board of India (SEBI), IT department, and company chartered accountant, are involved in the inspection process. Financial statements like assets and liabilities, balance sheets, and debts were analysed accurately. All other essential financial information is analysed minutely.
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Review of the Information
After completing the inspection and investigation, data is reviewed. All the results of the investigation are reviewed to confirm the accuracy of the result or findings. This review process is important to analyse the transparency of the company.
All the essential information is included in the final report of the company. This final report is presented to the buyer after the diligence process.
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Conclusion of Transaction
This is the final stage of the diligence process. The buyer is informed at this stage if discrepancies are found in the process. The report is shared with the buyers to disclose all the findings of the financial due diligence to future investors.
Financial Due Diligence Inclusions
It includes the analysis of the market and past performance of the company. Due diligence emphasises those factors directly related to the company’s financial growth. Financial due diligence includes the following factors:
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Investigation of Assets and Liabilities
One of the important processes of due diligence is investigating the structure and availability of past and current assets and liabilities. The condition and qualities of assets and liabilities are also examined.
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Analysing Tax
The liability of tax is another important aspect that is required to examine. The analysis includes whether the company is filing a tax return in time or not. It also helps to check if taxes are due by the company or not. Since many companies avoid the payment of tax, tax analysis helps immensely to avoid some conflicts in the future.
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Profits and Loss
Whether a company is making a profit or loss is an important factor to consider. Many companies hide this report to attract more investors. By analysing profit and loss, buyers can speculate on the company’s future prospects.
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Review Accounting System
It is also important to review the policies and regulations related to the company’s financial status. Management of the accounting system is also important.
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Check the Documents
It is also important to check all the company documents to determine whether the company complies with the financial statutes.
Why is Financial Due Diligence Required?
Financial due diligence is important for many purposes. Before buying a property, we analyse every aspect of it. In the same way, financial due diligence helps the buyers examine every aspect of the business entity they will buy. It helps the buyer in the following ways:
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Lower the Risk
Financial due diligence helps buyers lower the risk of buying the business enterprise. After analysing every financial aspect carefully, the buyer becomes aware of the situation that may arise in the future after buying the company
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Help to Take Decision
After analysing the financial status, the buyer can make the correct decision based on the findings of the financial report. The buyer and the seller can also negotiate properly, which complies with the current position of the buyer.
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Lessen the Chance of Getting into Litigation
After analysing the debts and liabilities of the company, the buyer can confirm the possibility of getting involved in litigation in the near future. If the buyer learns properly about the debts and litigation, he can take the right steps in clearing the debts and liabilities.
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Strengthen the Relation
Since a third party involves in the process of due diligence, no biased opinion is made while carrying out the process. The financial report prepared by the financial and legal experts helps the buyer and seller to trust each other, eliminating the shadow of a doubt.
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Ensure the Success of the Company
Since a company’s success depends upon its financial status, examining the company’s financial health helps determine the prospect. The buyer can prepare appropriate planning for the company’s future growth based on the current financial status.
Conclusion
With the help of financial due diligence, a buyer can get all the information related to the financial aspects of the company he targets to buy. He can make the correct decision when informed of the financial situation. Since various financial experts conduct due diligence, the chance of accuracy of the findings is also very high. Therefore the buyer can completely rely on such findings. It also reduces the risk of getting cheated upon or falling into any trap.
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