Due Diligence Report - Process, Importance and Types

Due Diligence Report - Process, Importance and Types.

Due Diligence Report is basically an internal memo shared with the executive team members who are involved in monitoring and are responsible for closing the deal. Let’s understand more about it.

What is Due Diligence Report?

Due diligence report is a simplistic process that includes research and analysis before an acquisition, or investment. Also, it is done before a business partnership or bank loan, to understand and find out the value of the subject undertaken for due diligence. Further it is relevant to ensure that there are no issues involved, which can be a blocker in the process.

Here’s how the due diligence process works:

• Analysis of multiple aspects is executed to find out the estimated value of the respective entity based on its market potential.
• Assessment and monitoring of the assets and liabilities in detail to determine the financial viability of the entity.
• Examining of the operations and verification of the data related to the entity that are relevant to the proposed transaction.

Types of Due Diligence Report

There are three types of due diligence report that are prepared in order to find out the respective desired details, before moving ahead with the transaction:

1. Business Due Diligence

This type of Due Diligence is about the detailed assessment of the parties involved in the transaction, various business aspects and the investment qualities are involved.

2. Legal Due Diligence

As the name suggests it emphasises on the legal segments of the transaction, any legal pitfalls, shortcomings and other legal issues. The transactions under scrutiny of this type of report encompass both inter-corporate and intra-corporate transactions. Along with that, there are multiple regulatory checklists that are involved to complete this type of diligence that includes existing documentation.

3. Financial Due Diligence

In this type of due diligence, all the financial, operational and market estimations are considered. With the inclusion of this type, the process of acquiring a company becomes easier. Assessment and in-depth study of accounting policies, audit practices, and tax compliances of the company are analysed in this category of due diligence.

Importance of Due Diligence Report

The due diligence report determines various aspects of a company that helps in going forward with any traction lined up for further growth of both the parties involved. Hence, to ensure all the elements and factors involved are well in place is what a due diligence report validates.

Here are a few notable benefits of having a due diligence report before any transaction:

1. With a detailed report, it helps in understanding about the company and its future plans to generate additional earnings either monetary or non-monetary.
2. An ideal due diligence report is a ‘ready to serve’ document to understand the status of various issues involved at the time of purchase/sale, etc.
3. It gives an overall picture of the business about its present condition and how it is going to perform in the future.
4. For an acquirer, the due diligence report helps in identifying and understanding the risks, liabilities and problems prevailing in the company before closing the transaction.
5. It also helps in avoiding losses and bad results later on. As they say, it's always better to know the present before you plan for the future.

Original source: https://www.resurgentindia.com/due-diligence-report-process-importance-and-types

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