People are investing millions of dollars to buy an entire firm. Before investing even a hundred rupees, investors or businesses conduct extensive research. Report acquired from this investigation is known as the due diligence report.
Elements of Due Diligence Report
The due diligence report summarises the data gathered throughout the due diligence process.
Due Diligence Is Divided Into Three Categories
- Business Due Diligence: a detailed examination of the persons engaged in a transaction, the business’s future viability, and the investment’s standard.
- Financial Due Diligence: This is a key step in evaluating the business’s operational, financial and commercial prospects. It gives the purchasing firm a clear picture of whether the purchase is worthwhile. It thoroughly examines accounting rules, audit methods, tax compliances, and internal controls.
- Legal Due Diligence: is concerned primarily with the legal issues of a transaction. It searches for any legal red flags or stumbling blocks. It frequently includes both intra-corporate and inter-corporate transactions.
A due diligence report may include the below elements:
- A statement explaining the research topic
- Corporate reports, legal records, transaction copies, market research, and other research documents
- SWOT Analysis summarises the proposal’s strengths, weaknesses, opportunities, and threats
- Any liabilities, debts, or financial responsibilities may alter any commercial transaction’s conditions
- Statistics and other information, such as surveys, valuation studies, inspections, market research, and, on occasion, public input.
Drafting a Due Diligence Report
Below are questions that must be addressed while writing a due diligence report:
- Who is the intended audience?
- What is the report’s purpose?
- What are the most important factors of decision-making?
A due diligence report focuses on the following areas:
- It evaluates the company’s viability, which may be accomplished by a detailed examination of the target’s commercial and financial characteristics
- It examines the ratios and financial facts to comprehend the monetary component of the proposed transaction
- It even focuses on examining the company’s macroenvironment and its influence on it. This is required since no firm functions in isolation
- The competency and reputation of the organisation’s individuals are crucial factors to examine
- A due diligence report will also include any pending lawsuits and regulatory difficulties
- The type of technology accessible to the organisation is a crucial consideration in today’s world
- It also focuses on developing a synergy between the two organisations to aid decision-making.
Need for a Due Diligence Report
The primary goal of this report is to provide the dealing party with an accurate image of how the firm will operate in the future.
- The basic goal of due diligence is to identify any red flags before the purchase is finalised. It aids in the detection of potential dangers in the future
- The information gathered through this report is critical for decision-making. If the corporation discovers any faults throughout the due diligence process, it may be able to negotiate
- The report helps the organisation comprehend how the target intends to make extra profits. For example, it functions as a reckoner in determining the status of affairs at the moment of sale or purchase
Sections of a Due Diligence Report
The following are the various sections of a due diligence report:
Financial Information: It entails reviewing copies of audited financial statements for the last five years, including all notes and management’s discussion and analysis.
Corporate Records: Legal counsel seeks to review a target company’s principal formation documents, including the articles or certificate of incorporation and bylaws. Suppose the target company is a corporation or the papers or certificate of organisation and operating agreement if the target company is a limited liability company, as well as all amendments.
Indebtedness: It entails analysing the seller’s indebtedness in terms of mortgages, notes, loan agreements, and security agreements; assessing the relationship with lenders; and doing constant commercial code searches with each daughter company.
Employment and Labor: It comprises full names of executives, all workers, and directors; records connected to pensions, stock plans, profit sharing, deferred pay, and other benefits or non-salary compensation; and any pending labour and employment law action.
Real Estate: This includes copies of papers such as real estate insurance policies, appraisals, studies, site assessments, government filings, and reports provided by consultants.
Agreements: All agreements of the company and its subsidiaries, including real estate leases, joint venture agreements or partnership, marketing, commission, sales, distributor, franchise agreements, and other material contracts.
Supplier and Customer Information: This comprises a list of suppliers and material customers and any correspondence with customers or suppliers regarding problems.
Legal: It comprises copies of reports submitted with government agencies, copies of government licenses, information on legal concerns and all litigation, and any environmental obligations.
Tips to Keep in Mind While Writing a Due Diligence Report
- If a problem is discovered when writing a due diligence report, consider describing it and its potential ramifications. For example, suppose it is found that the target firm is not under specific legislation. In that case, one might discuss the potential implications of such non-compliance and strategies to reduce such non-compliance.
- Inadequate comprehension of the work at hand or the goal of due diligence.
- A partial list of documents is necessary.
- Failure to examine concerns or obstacles that the customer may face as a result of missing critical issues such as concealed dues, expired licenses, and so on.
- To keep the report accurate, avoid unnecessary information.
- One must be patient, diligent, and detail-oriented.
- It is critical to ensure that only the most relevant and crucial material is included in the report.
- When conducting an investigation, it is necessary to ask if something appears to be a miss.
- If a person does not have a legal background, he should seek the advice of a lawyer or an attorney when preparing the report.
Conclusion
As this is more of a diligence procedure than a compliance effort, no explicit regulation governs it. It is a vital and critical step that each company must take when investing and determining the health of the company.
Read More:
- Importance of Financial Due Diligence
- Benefits of a Due Diligence Report
- What are the Benefits of Financial Due Diligence?
