Conducting Due Diligence
Conducting Due Diligence
Types of Due Diligence
1. Administrative DD
- Verification of operational facilities and occupancy rates.
- Analysis of operational costs and their inclusion in financials.
- Provides insights into the cost impact of business expansion.
2. Financial DD
- Review of audited financial statements for the last three years.
- Analysis of customer accounts, profit margins, and cost structure.
- Evaluation of debt situation, including interest rates and capital structure.
3. Asset DD
- Detailed schedules of fixed assets and their locations.
- Verification of real estate deeds, lease agreements, and mortgages.
- Assessment of major capital equipment sales and purchases.
4. Human Resources DD
- Analysis of current employee positions, vacancies, and contracts.
- Review of salary structures, benefits, and ESOPs.
- Examination of pending legal cases and labor disputes.
5. Environmental DD
- Validation of environmental permits and licenses.
- Review of disposal methods in compliance with regulations.
- Identification of contingent liabilities or regulatory violations.
6. Taxes DD
- Verification of tax returns and compliance for the last three to five years.
- Review of pending audits and correspondence with tax authorities.
- Analysis of unused tax credits or carryforwards.
7. Intellectual Property DD
- Examination of patents, trademarks, and copyrights.
- Assessment of pending claims related to intellectual property.
- Review of patent applications and clearance documents.
8. Legal DD
- Review of Memorandum and Articles of Association.
- Analysis of material contracts and loan agreements.
- Examination of shareholder meeting minutes for the past three years.
9. Customer DD
- Analysis of top customers and their total purchases.
- Review of customer service agreements and insurance coverage.
- Examination of customer satisfaction scores over the last three years.
10. Strategic Fit
- Assessment of technology, products, or market access gained.
- Evaluation of synergies and integration plans for the target company.
- Analysis of the strategic alignment with the acquirer’s business plan.
How We Conduct Due Diligence
How We Conduct Due Diligence
Our Process
1. Income Statements
- Examination of income statements for the last 3-5 years.
- Comparison of actual performance with projections.
- Identification of trends in revenue and expenses.
2. Records of Accounts Receivable and Payable
- Verification of customer payments and pending invoices.
- Review of supplier balances for potential liabilities.
- Analysis of the credit policies in place.
3. Balance Sheets and Tax Returns
- Review of balance sheets for assets and liabilities.
- Verification of tax returns and business activity statements.
- Ensuring tax compliance over the last 3-5 years.
4. Profit and Loss Records
- Detailed analysis of profit margins over the last 2-3 years.
- Identification of significant expense variations.
- Comparison with industry benchmarks.
5. Cash Deposits and Payments
- Reconciliation of cash deposits with financial accounts.
- Verification of cash payment records for discrepancies.
- Analysis of cash flow sustainability.
6. Utility Accounts
- Review of utility expenses for operational efficiency.
- Analysis of outstanding bills and recurring payments.
- Verification of supplier contracts and payment terms.
7. Bank Loans and Credit Lines
- Assessment of existing loans and repayment history.
- Review of terms for lines of credit and letters of credit.
- Evaluation of the company’s ability to secure future funding.
8. Meeting Minutes
- Review of directors' and management meeting minutes.
- Analysis of key decisions affecting the business.
- Identification of any governance issues or risks.
9. Intellectual Assets
- Review of trademarks, patents, and intellectual property.
- Assessment of pending intellectual property claims.
- Verification of documentation for monetization potential.
10. Contracts and Agreements
- Review of existing contracts with staff and clients.
- Verification of partnership agreements and lease arrangements.
- Assessment of termination clauses and financial impact.
11. Automated Financial Systems
- Assessment of software reliability for financial management.
- Verification of data accuracy and security measures.
- Review of compatibility with industry standards.
12. Credit and Historical Searches
- Analysis of the company’s credit history and ratings.
- Review of past disputes or claims involving the business.
- Verification of historical searches for undisclosed liabilities.
Warning Signs for the Investor
Warning Signs for the Investor
Important Considerations
1. Disclosure Issues
- Lack of transparency about financial statements and licences.
- Unwillingness to disclose staff contracts or reasons for seeking investments.
- Potential omissions that could hide underlying issues.
2. Resistance to Due Diligence
- Unwillingness to allow a trial period or provide adequate time for review.
- Rushing the process raises concerns about hidden risks.
- Reluctance to engage with suppliers or landlords is a red flag.
3. Legal and Financial Concerns
- Involvement in ongoing legal proceedings.
- Questionable credit records and repayment history.
- Lack of legal and accounting advice for financial handling.
4. Business Compatibility
- Assess alignment with your interests, experience, and capital.
- Determine if restrictions exist from franchises or group operations.
- Ensure the business has permissions for all activities.
5. Competition Analysis
- Evaluate if prices are competitive and market-driven.
- Consider if competitors are gaining strength.
- Understand risks of price-based competition from global markets.
6. Industry Trends
- Assess if the industry is expanding, contracting, or stable.
- Analyze potential impacts of deregulation or increased competition.
- Rank the business against sector competitors.
7. Supplier Relations
- Verify continuity of supply from current suppliers.
- Check for special conditions or unwritten agreements with suppliers.
- Examine the business's credit rating with suppliers.
8. Location Factors
- Assess location advantages or challenges affecting the sale.
- Consider new developments or zoning changes nearby.
- Evaluate impact of public works or major road developments.
9. Lease Agreements
- Verify lease terms, conditions, and obligations.
- Consider potential risks of landlord changes or redevelopment.
- Review legal advice on lease agreements.
10. Staff and Employment
- Examine staff contracts and defined remuneration packages.
- Verify compliance with wages, insurance, and benefits obligations.
- Ensure staff interviews are allowed pre-sale without interference.
11. Legal Obligations
- Review lease agreements and compliance notices.
- Assess legal proceedings or government requirements.
- Verify the business's legal structure and associated risks.
12. Tax and Financial Records
- Ensure full tax compliance and review capital gains implications.
- Examine records for profitability and growth potential.
- Project future cash flow and break-even points.
13. Sales Analysis
- Verify reliability and breakdown of sales records.
- Check seasonal or cyclical patterns in sales.
- Confirm all sales figures are accurate and business-specific.
14. Expense Investigation
- Ensure disclosure of all expenses, including compliance costs.
- Verify adequacy of insurance coverage.
- Watch for personal expenses added back for valuation purposes.
15. Profits and Warranties
- Analyze profit sensitivity to sales changes and inflation.
- Assess profit adequacy for investment risk.
- Plan for warranty or refund commitments if applicable.