Due Diligence - key aspect in third party acquisitions
- Neha Lodaya
- Dec 7, 2024
- 2 min read
Generally, in a deal scenario, the process of “due diligence” is crucial step as it not only mitigates the risk involved in acquiring the Target Company with historical liabilities but also enables an appropriate adjustment to the valuations upon the findings of the process.
Sometimes, a deal is called off on knowing certain unfavorable findings or red flagging of certain events (eg: The PhonePay and ZestMoney deal fell apart due to high NPAs in loan portfolio and concerns around the latters shareholding structure). An Investor may explore following aspects in a due diligence process:
👉🏼 Financial Due Diligence: Review of historical financial records + financial ratios to meet the investment criteria
👉🏼 Founders and Employees Due Diligence: Success of an organization is determined by talent / skills of the human factor running the show
👉🏼 Business operations and scalability: Detailed evaluation of Business model, future projections, expansion plans, working capital management, indication of revenue streams, client acquisition strategies, number of users / customers, growth potential etc.
👉🏼 Key Terms entered with Customers and Suppliers: The terms of understanding between the business partners affect operating margins, cashflows, level of business dependency alongwith determining the exclusivity rights (say for purchase / sale with such parties).
👉🏼 Intellectual Property: The IP rights are a key differentiator which would give the Investor a competitive advantage and uniqueness in the market upon acquisition.
👉🏼 Direct and Indirect Tax Due Diligence: Amongst other aspects analysis of withholding tax and GST compliance, availability of past years business losses post acquisition and review of ongoing tax proceedings etc.
👉🏼 Housekeeping of documents : Review of existing shareholders agreements and the key riders therein, board minutes, employment and customer contracts, lease agreements etc.
👉🏼 Litigation status: To evaluate potential contingencies / liabilities which may later also be factored in the deal value.
