Name : Sahil K Patil

Std : S.Y.BCom

Div : B

Roll No. : 225

Seat No. : 22460

Topic : 1) MEANING AND TYPES OF DUE

DILIGENCE: WHY DUE DILIGENCE 2)
OBJECTIVES AND SCOPE OF DUE
DILIGENCE©
MEANING : 
Due diligence is the investigation or exercise of care that a
reasonable business or person is normally expected to take
before entering into an agreement or contract
with another party or an act with a certain standard of care. It
can be a legal obligation, but the term will more commonly
apply to voluntary investigations. A common example of due
diligence in various industries is the process through which a
potential acquirer evaluates a target company or its assets for
an acquisition.[1] The theory behind due diligence holds that
performing this type of investigation contributes significantly to
informed decision making by enhancing the amount and quality
of information available to decision makers and by ensuring
that this information is systematically used to deliberate on the
decision at hand and all its costs, benefits, and risks.[2] As due
diligence investigation is such an exhaustive activity, there are
many different types of due diligence that can apply. The
importance of each will vary according to the industry and the
type of transaction. ‘There may be as many as 20 or more
different angles of due diligence analysis’ (Corporate Finance
Institute). When done properly, each type of due diligence will
support and inform the others for an integrated approach.
Ultimately, all the different examples of due diligence have the
same end goal. They provide businesses with the information
they need and the confidence that the transaction is worth
pursuing.
Types of due diligence :
1) Financial due diligence

Financial due diligence is a crucial assessment of the financial

health of the business where the company’s historical and
current financial performance is scrutinized. It’s aim is to
establish future forecasts with any and all potential risks taken
into account.
A key part of financial due diligence is reviewing financial
statements, assets, debts, cashflow and projections to
determine whether they are true and accurate. This helps the
buyer get a better understanding of the company’s core
performance metrics.

Learn more about financial due diligence and ensure none of

your most important financial documents are missed in your
next process.

2) Legal due diligence

Legal due diligence is an essential part of any transaction and a

mandatory consideration before entering into any merger or
acquisition. It is an exercise in risk assessment to investigate
any potential liabilities of the target company that could impact
a successful transaction.

Legal due diligence will typically include a careful examination

of all material contracts, including partnership agreements,
licensing agreements, guarantees, and loan and bank financing
agreements.
Protect yourself from critical risk in your next transaction. Learn
more about legal due diligence.
 3) M&A tax due diligence

Tax due diligence is the process of examining all the different

taxes applicable to a business, depending on its tax obligations
and which jurisdictions it sits within.

Corporate tax due diligence is a review of all the taxes a

company is required to pay. It assesses the company’s total tax
liability and the level of compliance with tax laws. This includes
the validation of documents like tax returns (usually for the last
three to five years), information pertaining to tax audits, and
agreements with tax agencies. It aims to ensure all the
company’s taxes are being paid and reported.
Assess compliance with tax obligations and understand the
impact of tax on the sale price for the buy side. Learn more
about commercial tax due diligence.

4) Operational due diligence

Operational due diligence covers all a target company’s main

operations and considers all of its operational facilities and
processes. In M&A transactions, operational due diligence
assesses whether operational improvements could create
additional value in the transaction, or if there are operational
risks that should be addressed. Learn more about operational
due diligence here.

5) intellectual Property due diligence

IP due diligence is an in-depth assessment of the quantity and

quality of a target company’s intellectual property assets. While
these assets are intangible, they are often an important
contributor to the company’s overall value and something that
can set them apart from their competition. In IP due diligence,
patents, copyrights, trademarks and brand are evaluated, along
with how well they are protected and covered. Learn more
about IP due diligence here.
 6) Commercial due diligence

Commercial due diligence (also called market due diligence) is

an important step in validating the opportunity strategically. This
process looks at the market size, market share, customer base,
competitors and potential future returns. Commercial due
diligence aims to assess if the deal is financially viable and the
likelihood of realizing value from it. Get a better understanding
of commercial due diligence here.

7) Information Technology due diligence

IT due diligence is an audit of a company’s IT infrastructure and

processes, frequently with a focus on security assessment.
This type of due diligence allows the acquiring company to
evaluate existing IT structures and identify any potential
security risks. Among other things, this includes how sensitive
data is managed and protected. Learn more about IT due
diligence.

8) HR due diligence

HR due diligence is one of the most underestimated and

extensive due diligence types. It covers the entire spectrum of
the workforce and all documentation pertaining to employees
and management. HR due diligence checks are essential for
getting a full picture of the company culture. It can identify any
people-based risks before proceeding with a transaction, such
as the likelihood of key roles exiting the business.
 
HR due diligence covers employee contracts, salaries, benefits
and bonuses, as well as any problems or grievances. All HR
policies and procedures are also carefully analysed.
 
Ensure you have all the right company human resources
information and that it’s structured correctly. Learn the ins and
outs of HR due diligence.

9) Regulatory due diligence

Regulatory due diligence is becoming increasingly important for

ensuring compliance amid a changing regulatory landscape. It’s
crucial that companies undertake regulatory due diligence to
identify areas of legal or regulatory risk that usually have a
zero-tolerance policy.

This type of due diligence is particularly important in heavily-

regulated industries such as Healthcare and Finance. Learn
more about regulatory due diligence.
10) Environmental due diligence

Environmental regulation is important for a company to

demonstrate, as risk of non-compliance can lead to heavy
penalties and even operational shut down. Environmental due
diligence is the means by which companies review all
environmental permits, licenses, and methods of disposal to
ensure all regulations are being followed. Learn more about
environmental due diligence here.

11 ) Power due diligence with AI

The above overview of due diligence types might give you the
impression that there’s a lot of work to be done - and there is.
One of the ways that Ansarada can help you make these
processes as efficient and secure as possible is with a suite of
AI-powered deal tools.
Ansarada’s AI tools can analyse the real-time flow of data from
interactions between bidding parties in a deal, including huge
volumes of information. This enables dealmakers to garner
value from tens of thousands of data points in seconds. They
can also automate hours of manual work to save significant
time and cost in efficiency alone

WHY DUE DILIGENCE?

Due diligence is an important part of the acquisition process

and represents the orderly investigation of any matter
pertaining to business dealings. Since no two companies are
the same, it's important that a diligent effort is made in order to
obtain any information that would be relevant in the sale or
purchase of an organization and its assets. In mergers and
acquisitions, due diligence helps clients recognize any financial,
legal, or operational risks that may not be noticeable from
outside perspectives, While due diligence may seem like it only
benefits one party, the fact is that due diligence helps both the
buyer and the seller in a business acquisition. From a buyer's
perspective, due diligence gives them peace of mind that
they're making the right deal and have all the information they
need to make a good purchasing decision. This information can
include learning more about the company's existing customers
and partner relationships and either validates positive
assumptions or alerts them about potential irregularities. From
a seller's perspective, due diligence helps a business owner
take a deeper dive into the financial integrity of their business
and can also help them uncover the fair market value of their
company. As valuations and acquisition prices are only getting
higher for many business sectors, it's essential that companies
invest in quality due diligence reporting and services.
The Objectives of Due Diligence is as follows:

1) To identify the strong point and to discover threats and

weaknesses
2) To take a good quality decision about an investment
3) To make a smooth decision
4) To develop confidence in shareholders
5) To provide a secure level in a transaction

Collect material information

One of the key objectives of due diligence is to minimize, to the

maximum extent practicable, the possibility of there being
unknown liabilities or risks. The exercise is multi-dimensional
and involves investigation into the business, tax, financial,
accounting and legal aspects of an issue.

The Scope of Due Diligence is as follows:

Depends on the needs of the people who are involved in

investments, addressing issues which are not covered, areas of
threat and identifying any new opportunities.
In general, it covers Compliance, litigations, uncovered risks
and future investments. The purposes of a due diligence review
are to assess the value of the asset to be transferred and to
identify and evaluate any risks involved in the transaction. The
documents that the investigator will review and the matters that
it will explore will depend on the transaction. The scope of the
review can include such diverse matters as the financial assets
of the target, regulatory concerns (for example, whether the
relevant compliances have been met and clearances obtained),
political factors, infrastructure factors, labour factors, taxation
factors, general litigation risks, and intellectual property.
Intellectual property due diligence occurs in any transaction
involving rights to technology, and may constitute the entire
investigation or a large part of it. The issues in intellectual
property due diligence generally fall within two categories:

Does the target have the legal right to practice the technology
and will those rights remain intact if the transaction is
completed? Among the questions relevant to this issue are
whether there any patent rights held by others that would limit
or interfere with the target's free ability, or the ability of any
other party to the transaction, to continue to practice the
technology after the transfer has been made.
Does the target have the legal means to exclude competitors
from practicing the technology? In particular, is the technology
covered by enforceable patent rights that are exclusively owned
or held by the target? Does the target have the full right to
assert the patents over infringers; and will this right be
transferred intact when the transaction takes place?