Due Diligence: Don’t Miss these

The usual checklist of due-diligence before recommendation for deals/investments involves a series of checks in accounting, actual check of inventory/bank balance and letters from vendors etc. However, the potential target must also be evaluated on certain qualitative parameters like the business model and environment, macroeconomic and social consideration and fit in the portfolio for the acquirer.

Below is a list of a few important considerations

Business model and environment

  • Is there any venture like businesses that has promising high growth?
  • Any Intellectual Property that can be leveraged for new streams of revenue?
  • Will the current management team continue?
  • Is there major re-structuring of business required?
  • What is the prospect of the business – Is this a declining industry?
  • When is the next level of large capital investments required for the current growth figure?
  • Credit ratings of the business
  • Evaluate investments made by the company in other businesses?

Liabilities

  • Litigations, pension not accounted in annual books of account
  • Regulations – Money laundering and disclosures
  • Tax implications (capital gain/ deductions) for the transaction
  • Identify other risks like contracts signed, government licenses status

Macroeconomic and Social considerations

  • The business relies on certain customer behavior, will it change?

Fit of the company in the portfolio

  • Is there more value add than financial wizardry? True alpha?
  • Are there other companies competing to buy the firm? What are their likely valuations?
  • What will be the exit valuation and strategy if the buyer is an investor?
  • Are regulatory approvals required for change of ownership?
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