Company Due Diligence meaning

To verify the adherence with financial, legal, and environmental reports for validating the company acquisitions, business partnerships or banking loans, etc. the Due Diligence report shall summarize all the analysis and audit findings.

In the funding process, client due diligence is most critical for startups. The company Due Diligence checklist to be guaranteed for compliance has been consolidated here.

Due Diligence for a new company

For due diligence procedures, while selling the company or applying for the loan, each corporation must present different documents to the buyer or lender. Due Diligence purpose is to ease buyer (investor) or banker’s decision to finance/purchase the company. Both parties must ensure that a Non-Disclosure Agreement(NDA) is signed before submitting confidential financial, legal, and regulatory papers to the other party for due Diligence.

Company/Business due diligence process

1. Terms of due Diligence

The terms and conditions for conducting the due diligence procedures are agreed between the parties.

2. Due diligence-operations

Collection of the documented Business operations’ data and records.

E.g., Customer validation, raw material, etc.

3. Due diligence-Finance

Financial data are collected, verified, and documented, such as income, sales, profits, taxes, assets, liabilities, etc.

4. Due diligence-Legal

Validated Regulatory compliances along with the legal documents.

Eg. trademark registrations, tax payments, etc.

5. Due diligence report

All of the processes mentioned above are centralized and shared with the buyer/banker and seller.

The buyer/banker can ask more questions about the operation if any.

Documents for company due Diligence

The following are the company documents for the due diligence process of the company.

  • MOA and AOA
  • Tax Payment Receipts
  • Statutory Registers
  • Property Documents
  • Utility Bills
  • Intellectual Property Registration or Application Documents
  • Certificate of Incorporation
  • Shareholding Pattern
  • Financial Statements
  • Employee Records
  • Operational Records
  • Bank Statements
  • Tax Registration Certificates
  • Income Tax Returns

Also Read: 10 Essential Legal Documents for Startups

Due Diligence Checklist

A list of files to be reviewed is presented below, including a due diligence checklist for companies.

Documents of MCA

The information from the Ministry of Corporate Affairs is used, to begin with, the due diligence process. MCA provides all the businesses with public master info. Everyone with small fees shall be made available to pay all documents filed with the Registrar of Enterprises(ROC). The documents available on the MCA website are:

  • Company Information
    • Date of Incorporation
    • Authorized Capital
    • Paid-up Capital
    • Date of Last Annual General Meeting
    • Date of Last Balance Sheet
    • Status of the Company
  • Director Information
    • Directors of the Company
    • Date of Appointment of Directors
  • Charges Registered
    • Details of Secured Lenders of the Company
    • Quantum of Secured Loans
  • Documents
    • Certificate of Incorporation
    • Memorandum of Association
    • Articles of Association

Other documents, such as financial documents and various other certificates of conformity, can also be downloaded for analysis and the above documents.

Articles of Association

A clear view of the class of shares and investors’ voting rights shall be given in Article of the Association. The article of a company’s association will state that the shares can not be transferred. Enter into the transferability of the shares.

Statutory registers of the company

The Companies Act,2013, establishes a private limited company to maintain various documents relevant to share transfers, share allocations, board of directors, etc. Reviewing statutory registers is necessary to ensure shareholders and directors.

Book of Accounts and Financial Statements

All company financial statements are checked and validated with supporting documents. Some diligence considerations follow:

  • Bank statements
  • Assets and liabilities
  • Cash flow information
  • All financial statements against transactional information

Tax review

To prevent potential malfunctions, all of the tax obligations of the company must be checked. Different factors are considered for the tax analysis and are:

  • An income tax return filed.
  • Income tax paid
  • Calculation of income tax liability by the company
  • ESI / PF Returns Filed
  • ESI / PF Payments
  • ESI / PF Payment Calculation
  • GST/Service Tax / VAT Returns Filed
  • GST/Service Tax / VAT Payments
  • The basis for GST/ Service Tax / VAT Payment Calculation
  • TDS Returns
  • TDS Payments
  •  TDS Calculations

Also Read: Continuous Compliance Requirements for Private Limited Company

Legal Aspects

Legal aspect of Due Diligence includes verification of liabilities and appeals by the company against legal proceedings/case/charges. A prosecutor usually handles it.

  • Legal compliance with all property belonging to the client.
  • No challenge to the sale of the company by the Secured Creditor.
  • Scan of legal records and legal submissions.

Operational Aspects

The business model and its implementation are fully understood at this point. It may also include business visits, employee interviews, board meetings, etc. The criteria to be addressed and documented below.

  • Business Model
  • Number of Customers
  • Number of Employees
  • Production Information
  • Machinery Information
  • Vendor Information
  • Utilities

Different business models and procedures need specific additional considerations to be addressed during the organizational due diligence evaluation.