A Study Circle Meeting on
“Due Diligence - A practical approach”
Saturday
15th day of April, 2017
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Due Diligence -Objective
Due Diligence - Process
Due Diligence – Practical Approach
International Entities
Case study
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Due Diligence
Objective
• Investments – Venture Capital, Private Equity
• Collaboration – creating long term corporate
relationship.
• Corporate Actions – Merger, Acquisition, Takeover
• Large Debt Transactions
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Due Diligence
Objective
• Initial Public Offer, Follow on Public Offer, Rights
issue, Employee stock option plan (ESOP’s),
Preferential allotment
• Setting up business units in India or abroad
• Setting up joint ventures
• Compliance of listing agreement
• Bank/statutory requirement
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Due Diligence
Objective
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Outsourcing arrangements
Technology and product licensing
Technology sharing
Distribution agreements
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Due Diligence
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Objective
To confirm financials, relationship with banks,
financial discipline, housekeeping, Tax discipline,
creditors, debtors etc.
Customer base and relationship – Customers are
retained or customer base is shifted frequently
Contracts – Quality and quantity
Manpower status
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Due Diligence
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Objective
To assess market standing of the business
Goal is to make the investment decision easy
Decision should be informed decision
Help to understand existing potential, future
opportunities and threats associated with a
particular business
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Due Diligence
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Objective
To confirm facts before investment decision.
Remember fraudulent dealings are not straight
To determine market capitalization of the target
company.
Ownership pattern
To understand why promoters wants to disinvest?
Whether there is threat of changing legal provision,
local problems etc.
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Due Diligence
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Process
Finalization of agencies
Scope of every agency
Time Limit – Need tight control
Non Disclosure Agreement
Kick off meetings
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Due Diligence
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Process
Pre diligence – Signing Letter Of Intent, Non
disclosure agreement, Engagement letter
Deal breakers
Deal diluters
Deal cautioners
Deal makers
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Due Diligence
Process
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Finalize the process
Identify internal resources
Monitoring is very crucial
Place of due diligence – can make or break the
process
• Who will lead the process?
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Due Diligence
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Process
Financial due diligence
Legal due diligence
Commercial due diligence
Human resources
Operational resources
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Due Diligence
Process
Financial due diligence
• Housekeeping can enhance enterprise value
• Discipline in payment of taxes, filing of returns and
assessment in time
• Balance sheet quality – e.g. levels of receivable,
payables, disputed amounts, stock, investments
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Due Diligence
Process
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Legal due diligence
Analysis of contracts and other documents
Evaluate any hidden legal hazards
Examine existing lawsuits exist
Ensure that there is no hidden information
regarding lawsuits
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Due Diligence
Process
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Human Resources
Processes followed by HRD
Evaluate the quality of HR
Identifying the qualifications
Verify technical ability and working initiative.
Focus on senior management personnel and key
staff
• Interview with senior staff members
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Due Diligence
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Process
Operational Due Diligence
Evaluate firm’s business model
Future potential
Examine existing market standing
Information regarding competition and it’s correct
evaluation
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Due Diligence
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Process
Technology due diligence
Intellectual property due diligence
Environmental due diligence
Information security due diligence
Ethical due diligence
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Due Diligence
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Process
Preparation of data room
Virtual or physical
Advantages of virtual data room
Savings in cost, time
Comfort to buyer, seller
Availability of information at any time
Multiple access, Easy to set up, Secured, Efficient
but no personal interaction
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Due Diligence
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Process
Check list information
Providing information and solving the queries
Understanding pain points
Data can be collected from various sources
Avoid self contradiction in data
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Due Diligence
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Process
Understand the queries correctly
Provide information on need to know basis
Involve optimum resources
Provide Training to the staff before commencing DD
activity
Set time limit
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Due Diligence
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Process
Unity of command is important
Withstand pressure of interested parties
Focus is must
Term sheet finalization – basis of future
transaction
Shareholder’s agreement
Amendment in AOA
SEBI notification dated 4 January 2017 SEBI 4
JAN 2017.pdf
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Due Diligence
Common issues in Due Diligence
• Application of accounting standards
• Contingent liabilities
• Related party transactions
• Doubtful ownership of assets
• Tax payments
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Due Diligence
Common issues in Due Diligence
• Verification of contracts with the customers
• Insurance policies – period and adequacy of
cover obtained
• Group company business model – whether there
is totally unrelated businesses, whether
promoters have bandwidth and competency in
handling those businesses
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Due Diligence
Follow up work
• Proposed resolutions for corporate financial risk
which are discovered in the course of financial
investigation
• Work out Financial feasibility of investment
model
• Financial forecast of investment returns
• Financial risk evaluation of investment program.
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Due Diligence
Follow up work
• Evaluate financial and internal audit system.
Suggest appropriate professionals
• Financial management system
• Internal control system
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Due Diligence
Follow up work
• Pre-transaction Asset Valuation Review
• Cooperate with assets valuation work;
• Connecting with valuation firms, ensuring
favorable asset evaluation results;
• Constructive suggestion regarding important
issues of asset valuation
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Due Diligence
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End objective
Reach optimum price point
Ensure Legal protection
Ensure commercial viability
Ensure continuity of business contracts
Capitalise the hidden potential of business
Secure maximum profits
Valuation multiples
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Due Diligence
• Check list 12.1 Check list due diligence INT.pdf
• Check list 22.2 Preliminary Legal DD
Checklist.doc
• Check list 32.3 Sample check list.doc
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Due Diligence
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Practical approach
Withdrawal of deal
Adjusting the valuations
Solving of problems uncovered during due
diligence process
Identification of areas where warranties and
representations are required
Bridge the gap between existing and expected
To enhance confidence of all stake holders
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Due Diligence
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Practical approach
Close the deal without delay
Clarity on deliverables including fund flow
Formalities during fund flow
Compliances after receipt of funds
Keep it in mind this is not the last transaction
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Due Diligence
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Practical approach
Induction of directors
Adoption of new MIS requirements
Must work towards good corporate governance
Overall beneficial for the organization
Take a view where it is heading
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Due Diligence
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International deals
Try to understand the culture
Perfect homework is must
Handle the intermediaries with care
Speed is the essence of the process
Do not show over enthusiasm
Do not take things for granted
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Due Diligence
Case study
• Private equity investments – auto component
industry - astronomical valuations – painful
experience
• Manufacturing company – deal based on wrong
valuations – MD faced the consequences – forced to
resign and lost control over the company
• Service industry – agreed to give heavy returns –
after the agreed period promoters faced the
pressure
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Due Diligence
Case study
• Smooth transaction in selling of auto component
company – reasonable expectations on returns
and indemnification – build in safeguards – good
team work
• HR intervention was done in proper way
• If the promoters are interested in personal gains
at the cost of organization, DD process is more
tricky and more care should be taken
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Due Diligence
Thank you
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