Due Diligence Report: Overview, Types and Benefits
January 04, 2023
The process of systematic analysis and risk mitigation associated with an investment or business decision is known as due diligence. The due diligence process includes the analysis of the financial viability of a business with regard to its assets and liabilities, a comprehensive study and evaluation of its operations, and a thorough examination and verification of its material facts with regard to a proposed transaction. A due diligence report includes the compilation of the data obtained throughout the due diligence process.
Usage of a due diligence report
Depending on the industry and the report's objective, a due diligence report's format and content may change.
- Real Estate - The potential earnings of a property, its capitalization rate, expected vacancy rates, etc., are all evaluated by real estate investors and developers using due diligence reports. A real estate professional's due diligence checklist should also include the following:
- Property taxes
- Comparable properties
- Inspection reports
- Opportunities for further development
- Business Valuation - Business valuations are essential for assisting managers in making better decisions when a company is growing, going public, merging, being acquired, etc. Typically, a due diligence report for valuations will focus on the following:
- Financial statements
- Financial projections
- Capital structure
- Advantages, disadvantages, opportunities, and possible threats associated with the market
A company valuation due diligence report could be a prerequisite when applying for a business loan or seeking capital from outside investors.
- Sale, Mergers and Acquisitions - A due diligence report is necessary for a firm that is up for sale and is contemplating merging with another business or buying another company. A quick summary of the relevant financial information, likely business outcomes, and challenges should be included in the report.
The following aspects related to the business need to be incorporated.
- Corporate records
- Financial information
- Data on real estate, owned or leased
- Legal documents
- Supplier and customer information
- Joint venture, marketing, and licensing agreements
The need for a due diligence report
Due diligence is carried out in order to determine the worth of the subject (a company or other entity) and spot any significant problems before making an acquisition, investment, commercial partnership, taking a bank loan, or making other vital decisions. The information obtained during this process is put together into a report that explains how the company aims to boost earnings. It provides a brief summary to help understand the conditions at the time of purchase, sale, etc. The report's ultimate objective is to provide readers with a clear picture of how the company will likely operate in the future.
Types of Due Diligence Report
- Business Due Diligence: Business due diligence entails scrutiny of every party involved in a transaction, the business's prospects and potential and the potential of investments.
- Financial Due Diligence: Financial due diligence involves determining the viability of the business and its operations, and assessing the financial health of an organization. It provides the acquiring business with a clear view of the target business’ profitability. Internal controls, tax compliance and auditing processes are all closely scrutinized in the due diligence process.
- Legal Due Diligence: Legal due diligence focuses on legal complications associated with a transaction. It looks for any possible legal pitfalls or barriers. Both internal and external company transactions are often scrutinised in the process.
Drafting of the Due Diligence report
The following questions must be addressed in a due diligence report.
- How has been the past operational and financial performance?
- Who is your target audience?
- What is your objective?
- Which aspects of the business will be key to vital decisions the company may have to make?
Importance of Due Diligence Report
- A complete report helps gain a thorough handle on the company and its long-term goals for producing additional revenue.
- The report serves as a ready reckoner to help understand challenges that can emerge during a purchase or sale.
- It offers a comprehensive analysis of the business's history, present, and expected future performance.
- With the aid of the due diligence report, before concluding the purchase, an acquirer may pinpoint and understand the risks, liabilities, and problems that exist in the firm.
Top due diligence service provider
Resurgent India Limited is a Category 1 Merchant Banker with a pan-India presence. A great amount of research and fact-checking is needed in order to determine an investment's worth. We work with a talent pool of 200+ to simplify your research, concentrate on the most important aspects of your proposal, and provide a clear roadmap.
We provide services in a variety of fields, including mergers and acquisitions, private equity, debt management, structured finance, capital market solutions, transaction advisory, valuations, government consulting, enterprise risk management, stressed asset management, fintech solutions, training, and a few others.