Due diligence involving the financials of a company is commonly conducted during M&As. Read this post to understand how this due diligence process is performed in India.
The financials of the target company play a critical role in every Merger and Acquisition (M&A) scenario. As a result, there is a dedicated branch of due diligence, known as financial due diligence, conducted by the buyer to better understand the target company from a financial perspective.
Performing financial due diligence is also crucial for the buyer to comply with the M&A standards prescribed by various authorities and statutes, like SEBI, RBI Act, Banking Act, and the Income Tax Act. Here is a detailed overview of how it is performed in India-
- Establishing the Transaction
The buyer generally hires a 3rd party due diligence consultant for performing financial due diligence. The consultants have a team of Chartered Accountants, lawyers, company secretaries, and IT professionals for conducting due diligence. The first step of the process is collecting specific information about the target company, including its financial background.
The due diligence provider generally arranges training sessions for the employees involved in the diligence process. The service provider will also create a DDQ (Due Diligence Questionnaire) which will be shared with the seller or target company for retrieving relevant financial data.
- Data Management
Data management is the process of exchanging information between various departments of the buyer and seller/target company. The majority of the data exchange is now performed electronically. After exchanging, the data is stored in dedicated server rooms or data rooms.
The diligence provider will also regularly create back-ups of the exchanged information to avoid any discrepancies throughout the M&A process.
- Due Diligence Investigation
The collected data is investigated and cross-checked with multiple authorities to confirm its accuracy. Authorities like the IT Department, Ministry of Corporate Affairs (MCA), Securities and Exchange Board of India (SEBI), Company Chartered Accountant, and even the Government of India can be involved in the investigation.
Financial documents such as the statement of assets, balance sheets, liabilities, and loans taken by the target company are closely analyzed in this step.
- Investigation Review
The due diligence provider will note all the findings and investigations of the financial due diligence process. The latest reports related to the financial health of the target company are analyzed to offer a transparent overview to the buyer.
All of this information is incorporated in the final offer document, which is presented to the buyer after completing the diligence process.
- Concluding the Transaction
The findings of the financial due diligence procedure are shared with the concerned parties in this last phase to assist in the transaction conclusion. The buyer is also informed about any of the inconsistencies found by the diligence provider about the target company.
The compliance reporting status of the target company is also shared with the buyer, and disclosure is released for prospective investors.
Financial Due Diligence for Improved M&A Decision-Making
M&As can have significant financial and reputational consequences for the involved parties. Conducting thorough financial due diligence is one of the most effective ways to understand the financial health of the target company and make appropriate decisions.
As the role of the due diligence provider is the most vital in the process, investors and buyers should only trust reputed business consultants that specialize in financial due diligence for the best results.