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WHAT IS THE PURPOSE OF A DUE DILIGENCE IN A BUSINESS ACQUISITION?

WHAT IS THE PURPOSE OF A DUE DILIGENCE IN A BUSINESS ACQUISITION?

by CA Jai Kumar Shah, September 13, 2021

The year 1991 saw the opening of the Indian economy with the economic liberation that saw lots of mergers and acquisitions happening. Mergers and acquisitions have become the easiest and fastest ways for a company to organize itself from top to bottom and become financially more profitable. It is the process by which one company merges with another or acquires another. To make sure that the buyer knows exactly what they are buying, financial due diligence services should be hired.

Understanding Due Diligence

Due diligence is the process of investigating any person or business before signing a contract. When it comes to due diligence services, they are usually to help one company merge or acquire another company and provide assistance that helps them find out exactly what they are buying.

Due diligence companies in India work by helping the buyers find out everything there is to know about the seller, verify the appropriate information, as well as the contracts, finances, and the customers. By getting this information, the buyer company is better prepared to make an informed decision about the company that is being bought. Also, there is a sense of clarity that comes with having the right information.

Why Is Due Diligence Important?

There are many reasons why it is so.

  • Warranties And Representations

The accuracy of warranties and representations of the selling company is one of the first things that due diligence services will concentrate on.

  • Future Earnings

The next thing that due diligence companies in India have to do is to find out what the future earnings of the selling company look like. It is a sort of big picture that the buyer needs to make an informed decision.

  • Full Analysis

As a buyer, it is extremely crucial to get a full analysis of the selling company before it is being bought. For this everything has to be investigated to make sure there is an appropriate analysis of what the selling company looks like and what its growth is going to be like.

  • Find Out And Deal With Any Issues

For due diligence service providers, it is very common to notice issues and obstacles within the seller company. Many such issues can become deal-breakers (the buyer considers the issue too big to ignore and cancels the buying proceedings). But many issues can be resolved by proper mediation and action.

  • Smooth Transition

Whether it is a merger or acquisition, a smooth transition for the buying company is the goal. For this financial due diligence services ensure that everything is planned and things get done smoothly. Also, fewer hassles mean that the company will face little or no downtime.

Purpose Of Due Diligence In Business Acquisition

If you are a prospective business owner with an eye on a particular business you want to acquire, due diligence helps you make an informed decision every step of the way. Examining the business in detail before making the final decision is crucial.

Is the value of the business the same as what the seller is projecting to you? Are there any risks associated with it? Will you be doing yourself a favour by acquiring it? Does it have a strong future? All these questions get answered when you choose due diligence services from a professional.

With this information, it is possible for you as a potential business owner to find out a business’s financial position, identify the risks and find out the ongoing potential. It is also a chance to ask any questions and receive answers about the inner workings of the selling company.

When done properly, due diligence service providers can help you make the decision between buying a company that helps you make money or buying one that costs you money.

How A Business Gets Investigated

Due diligence companies in India work by reviewing the following points about the selling company:

  • Statements of income
  • Payable and receivable accounts of the company
  • Balance sheets
  • Tax returns
  • Profit and loss records for the past 3to 5 years
  • Utility accounts
  • Bank loans, credit notes, lines, and credit
  • Audit work done
  • Stocks
  • Privacy details
  • Partnership agreements
  • Contracts with suppliers, employees, and partners
  • Lease arrangements
  • Details about plants equipment, vehicles, and fixtures

As a potential business owner, you can choose one of the best due diligence companies in IndiaSetMyCompany, for performing due diligence before you sign the deal. They will be able to not just gather data but will also provide inputs on whether the decision to buy is a sound one. They also provide new business-owners with the Startup India registration process. If you want to make money with the merger or acquisition, due diligence should be in your action plan.

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