Due diligence is a process of analyzing a company’s potential, assessing the company’s financial viability at a comprehensive level, and examining the material facts related to the Company concerning a potential transaction. It is an investigation, audit, or review performed to validate facts or details of a matter under consideration.
Due diligence is an exhausting process that consumes significant time during the Fund-raise process. It is a deal maker or deal breaker process. Hence, the Company must be prepared for due diligence before going for a fund-raise.
It will not only help the Company to complete the fund-raise process seamlessly but will also help it to streamline its core as well support business functions like Finance and Accounts, Governance, Tax, Legal, Secretarial, etc.
In this article, we will lay out the key areas with which the Company needs to be ready.
The company shall perform detailed checks under each area below to prepare for Due Diligence.
- Monthly MIS reports providing information on sales, costs, company performance, run rate, etc.
- Historical and current period financials including schedules, notes to accounts, balance sheet, profit and loss accounts, cash flow statements, and more.
- Breakdown of Assets & Liabilities; Income and Expenses
- Working Capital Analysis, Trade Receivables & Trade Payables with respective ageing schedules
- Inventory records, physical verification report, ageing, etc.
- Fixed Asset Register including information on cost, depreciation, sales value; physical verification report
- Bank Reconciliations, Cash register, Investment schedule
- Borrowings schedule including terms, interest rate, agreements
- Related party transactions
- Significant accounting policies adopted for preparing and presenting financial statements
- Details of any exceptional, prior period, or extraordinary item.
- Reconciliation between MIS and financial statements.
- HR & Payroll Policies adopted by the company.
- Organization Structure of the company
- Monthly Payroll Sheets containing total cost to the company
- Agreement copies with KMP, Founders, Director
- Labour Compliances include ESIC, PF, MWIF, Professional tax, etc.
- Employment contracts with key terms like Confidentiality, Non-Solicit, IPR, etc.
- Employees evaluation reports and appraisal
- Tax Forms, Workings and Acknowledgement for all filed returns
- Outstanding dues on account of assessment, notice, or litigation against the company
- Tax reconciliations
- Detailed break-up of any balances with the revenue authority, etc.
- Tax withholding with the company
- Any tax opinion sought
- Compliance Calendar along with actual filing dates
- Complete company details like registrations, KYC, certificates, etc.
- Patents, Trademark, IPR details
- Charter Documents like Memorandum of Association & Article of Association filed with the ROC
- Previously filed ROC forms for any corporate event,
- Registers, minutes, and resolutions maintained as per the Companies Act
- FEMA compliances in case of FDI
- Shareholder’s Agreement
- Pending legal actions
- Property agreements
- Agreements with key vendors & key suppliers, etc.
- Insurance policies
The level of DD readiness may vary for each company based on the maturity of each company. The larger the company, the more stringent the requirements and vice versa.