Various Aspects of our Due-Diligence
Due diligence is an extensive process undertaken by an acquiring firm in order to thoroughly and completely assess the target company’s business, assets, capabilities, and financial performance. There may be as many as 20 or more angles of due diligence analysis.
The main types of due diligence inquiry are as follows:
- Administrative Due diligence
Administrative Due diligence is the aspect of due diligence that involves verifying admin-related items such as facilities, occupancy rate, number of workstations, etc. The idea of doing due diligence is to verify the various facilities owned or occupied by the seller and determine whether all operational costs are captured in the financials or not. Admin DD also gives a better picture of the kind of operational cost the buyer is likely to incur if they plan to pursue expansion of the target company.
- Financial Due diligence
One of the most important types of due diligence is the financial due diligence that seeks to check whether the financials showcased in the Confidentiality Information Memorandum (CIM) are accurate or not. Financial Due diligence aims to provide a thorough understanding of all the company’s financials, including, but not restricted to, audited financial statements for the last three years, recent unaudited financial statements with comparable statements of the last year, the company’s projections and the basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc.
The financial due diligence process also involves analysis of major customer accounts, fixed and variable cost analysis, analysis of profit margins, and examination of internal control procedures. Financial DD additionally examines the company’s order book and sales pipeline in order to create better (more accurate) projections.
Many acquirers have a separate section of financial analysis focused on the target company’s debt situation, evaluating both short-term and long-term debt, applicable interest rates, the company’s ability to service its outstanding debt and to secure more financing if needed, along with an overall examination and evaluation of the company’s capital structure.
- Asset Due Diligence
Another type of due diligence conducted is asset Due diligence. Asset due diligence reports typically include a detailed schedule of fixed assets and their locations (if possible, physical verification should be done), all lease agreements for equipment, a schedule of sales and purchases of major capital equipment during the last three to five years, real estate deeds, mortgages, title policies, and use permits.
- Human Resources Due Diligence
Human resources due diligence is extensive. It may include all of the following:
- Analysis of total employees, including current positions, vacancies, due for retirement, and serving notice period
- Analysis of current salaries, bonuses paid during the last three years, and years of service
- All employment contracts, with nondisclosure, non-solicitation, and non-competition agreements between the company and its employees. In case there are a few irregularities regarding the general contracts, any questions or issues need to be clarified.
- HR policies regarding annual leave, sick leave, and other forms of leave are reviewed.
- Analysis of employee problems, such as alleged wrongful termination, harassment, discrimination, and any legal cases pending with current or former employees
- Potential financial impact of any current labor disputes, requests for arbitration, or grievance procedures pending