A business entity may be involved in sale of services or goods as a business activity. The customers buy these services or goods from the company and pay the agreed price for that service or product. Now, there are various options for payment that a company may offer to its customers. It may receive cash or wired transfer from its customers and in some cases, the company may offer its services or goods to selected customers on credit. Accounts receivable refers to the outstanding invoices a company has or the money the customers owe to the company for the services or goods sold. Many companies try to increase their revenues by allowing some percentage of the total annual sales to be on credit. A business has to offer this type of credit line to frequent or special customers who are invoiced periodically. This credit line also helps the customers to avoid the hassle of physically making payments every time a transaction is made.
Due diligence refers to an investigation or an audit performed usually before an acquisition, investment, business partnership or bank loan, etc, to check the compliance with financial, legal and environmental reports to validate the business. All such investigation and results of the audit will be summarized in a Due Diligence report.
Company due diligence for startups is most essential when the startups are in the funding round. Here we have consolidated the Company Due Diligence checklist that is to be ensured for compliance.
Any business must propose it’s various documents to the buyer or the banker before selling the company or applying for the loan for the due diligence processes. Due diligence purpose is to ease the buyer(investor) or the banker’s decision in funding/purchasing the company. Both parties must ensure the signing of a Non-Disclosure Agreement(NDA) before furnishing the confidential financial, legal and regulatory documents to the opposite party for the due diligence process.
1.Terms of due diligence:
The terms for performing the due diligence process are mutually agreed upon between the parties.
Data and records about the operation of the business are gathered and documented
Eg: Customer validation, raw material, etc.
Financial Data such as revenue, sales, profit, tax, assets, liabilities, etc, are collected, verified and documented.
The legal documents and regulatory compliances are validated and documented.
Eg. Patents,tax payments, registrations etc.
5. Due diligence report:
The results of all the above processes are consolidated and shared with the buyer/banker and with the seller.
The buyer/banker may raise further queries on the process if any
The following are the documents to be provided by the company for the company due diligence process.
A Company Due Diligence checklist with the list of documents to be reviewed is presented below
To begin with the due diligence process, the data from the Ministry of Corporate Affairs is used. MCA provides the master data of all the companies publicly. All the documents filed with the registrar of companies(ROC) will be made available to anyone with the payment of a small fee. The documents which can be assessed through the MCA website are:
-Date of Incorporation
-Date of Last Annual General Meeting
-Date of Last Balance Sheet
-Status of the Compan
-Directors of the Company
-Date of Appointment of Directors
-Details of Secured Lenders of the Company
-Quantum of Secured Loans
-Certificate of Incorporation
-Memorandum of Association
-Articles of Association
In addition to the above documents, other documents like financial documents and various other compliance certificates can also be downloaded for review.
Article of Association will provide a detailed view of the class of shares and the voting rights of the investors. The article of association of a company may say the shares are not transferable. Make sure the shares are transferable.
A private limited company are ascertained by the Companies Act,2013 to maintain various documentation related to Share transfers, share allotments, the board of directors etc,.The review of statutory registers are necessary to ensure the shareholding and directors.
All the financial statements of the company are checked and duly verified with supporting documents. Following are some considerations for due diligence:
All the tax liabilities of the company to be reviewed in order to avoid any future mishappenings. There are various factors taken into account for the tax review and they are:
The legal due diligence involves the check of any liabilities and appeals to lawsuit/case/charges by the company. It is usually done by a Law professional.
A complete understanding of the business model and its operation is acquired in this stage. It may also involve company visits, employee interviews, meet with board directors etc. The following criteria to be covered and documented.
Various business models and operations demand various other factors to look into, which should be also considered while assessing the operational due diligence.