The Importance of Due Diligence When You’re Buying a Business
Acquiring a business is deemed as one of the most critical activities for a business or shareholder. Evaluation of the target business is as important as timing the acquisition of a business. The acquirer must assess various questions, such as return on investment, issues associated with the business, hurdles, and obstacles in productivity and sales. Due diligence is an investigation/appraisal tool by which the purchaser can discover the potential liabilities and financial aspects of a target business to avoid surprises and shocks after the purchase.
Why does due diligence need to be executed before acquiring a business?
Purchasing a business, on the grounds of assurances from the seller can turn an investment into a large loss. Carrying out due diligence properly by engaging external due diligence companies in India helps in:
Identifying veiled critical issues: Mostly, sellers tend to project only the positives of the business. They veil critical issues causing incongruity in the reported and actual financial position. Only plans and prospects are not sufficient for consolidation of the ground of purchase. Through due diligence services in India, these underlying critical factors can be brought to the fore, with proper reporting.
Proper evaluation of the financial history of the business: It is often observed that sellers manipulate the price of the business for their profits. Balance sheets are most prone to this issue, hence are given lesser importance by investors. Carrying out due diligence, the firm’s true financial records including balance sheets, insurance coverage, sources, and expenditure can be portrayed.
Evaluation of Tax history of the business: Carrying out due diligence through the due diligence companies in India, will help to reveal tax reports and tax positions, tax filings, etc. Through it, the prospective owner can also identify whether the firm had been able to able to collect tax from buyers, which will turn out to be a liability for the buyer.
Checking for any contingent liabilities: Through due diligence, contingent liabilities are discovered which may consist of litigations (ongoing or potential), trade disputes, employee disputes, a lien on an asset owned by the business, bank guarantees, etc. Verification of data provided by the seller needs to be done on multiple fronts.
What does the Due Diligence process include? How long does it take?
The due diligence process entails a comprehensive inspection or appraisal of the business’s financial statements and records. Customer lists, vendor lists, asset registers, related party transactions, copies of documents of incorporation, bylaws, minutes of board meetings, contracts, warranties, service agreements, product liability documents, and agreements with regulatory authorities are properly inspected. Catalogs, brochures, price listings, patents, trademarks, copyrights, and license agreements are also under the scanner along with market analysis, SWOT analysis, customer feedback, asset review, and shareholding pattern review.
Due diligence services in India is a complex process, hence may consume lots of time, but usually takes a month or two, if carried out by a firm with sufficient experience.
Importance of cooperation from the target company’s management in the course of due diligence:
It is important to determine whether management and executives of the company are honest, and their level of compliance while carrying out the due diligence process. If they comply fully and fairly with the diligence experts, the entire due diligence process can be carried out smoothly.
Conclusion
Due diligence is a very productive process, which when carried out properly can save owners from making poor investments, huge potential losses, and potential lawsuits. It helps in the proper evaluation of the business to be purchased. Hence, a due diligence process plays a crucial role in the acquisition of businesses and is mandatory.