Financial Due Diligence

It is an investigation of a target business's financial position and performance carried out for a buyer, investor or lender before a transaction. It checks whether reported profits, assets and liabilities are reliable and sustainable, and identifies risks that should affect the price, the deal structure or the protections in the agreement.

Before acquiring a company or business, making a significant equity investment, merging two companies, entering a joint venture or lending against a business. Sellers also commission it before a sale or fundraise so that they know what buyers will find and can fix issues in advance.

A statutory audit gives an opinion on whether the financial statements are true and fair under the Standards on Auditing. Due diligence has no fixed format: its scope is set by the buyer, it adjusts the numbers to show sustainable earnings and cash needs, and it looks for risks that matter to a specific deal, including future exposures an audit would not report on.

It adjusts reported profit to show the earnings the business can repeat. One-off income or expenses, non-market related party terms, promoter costs run through the company, accounting policy changes and items booked in the wrong period are identified and adjusted, giving a normalised EBITDA on which the price is usually based.

It is the normal level of working capital the business needs to operate, usually based on an average of recent months. The purchase agreement compares working capital at completion against this peg, and the price is adjusted up or down, so the seller cannot run down receivables or stretch payables just before the deal.

They are obligations that are not shown as borrowings but will cost the buyer cash, such as unpaid statutory dues, deferred salaries and bonuses, gratuity and leave encashment liabilities, customer advances for work not yet done, overdue creditors and tax demands. They are usually deducted from the enterprise value along with debt.

Buy-side due diligence is commissioned by the acquirer or investor to test the target. Vendor due diligence is commissioned by the seller before going to market, so that issues can be fixed or disclosed early, the sale moves faster and buyers can rely on a common report, often with their own limited confirmatory review.

For a small or mid-sized private company it commonly takes a few weeks from receiving the data. The time depends on the size and complexity of the business, the number of entities and locations, the agreed scope and, most of all, how quickly the target shares complete information and answers queries.

Usually the last two or three financial years plus the current year to date, so trends and seasonality are visible. Tax and compliance reviews can go further back where assessments or limitation periods are still open.

Revenue recognised early or not backed by contracts, a few customers making up most of the sales, cash expenses without support, unreconciled GST or TDS credits, unpaid statutory dues, pending tax demands, related party transactions on unusual terms, missing ROC or FEMA filings, and personal expenses of promoters charged to the business.

Yes. We review income tax, GST, TDS and payroll compliance, open assessments, notices and litigation, and the tax position on the proposed structure. Exposures found are quantified where possible so that they can be covered by a price reduction, an escrow or a specific indemnity.

In a share purchase the company keeps all its history, so past tax, regulatory and contractual liabilities stay with it and pass indirectly to the buyer. In a business or asset transfer the buyer can choose what to take, though some liabilities, such as tax on the transferred business under GST law, can still follow it. Due diligence helps decide which route suits the deal.

Yes. Under the income tax law, a closely held company generally cannot set off its past business losses if more than 49% of its voting power changes hands, subject to exceptions such as those for eligible startups. Due diligence identifies the losses at risk so that the buyer does not pay for tax benefits it cannot use.

The Act does not prescribe due diligence, but a merger or demerger under the National Company Law Tribunal route or the fast-track route needs a scheme, valuation and share exchange ratio that the boards must be comfortable with. A financial review of each company supports the swap ratio and flags liabilities the merged company will inherit.

No. Due diligence tests the quality of the numbers and the risks; valuation uses those numbers to estimate what the business is worth. Findings such as normalised earnings, net debt and working capital needs feed into the valuation. A valuation report required under the Companies Act, income tax or FEMA is a separate engagement by a registered valuer or merchant banker as the law requires.

Revenue quality and customer contracts, cash burn and runway, unit economics, the cap table and past share issues, ESOP grants, FEMA compliance on earlier foreign rounds, intellectual property ownership, founder-related transactions and pending statutory dues. Early-stage reviews are usually lighter and focused on these areas.

Normally the party that relies on it: the buyer or investor for buy-side due diligence, and the seller for vendor due diligence. Fees are agreed before work starts and are not linked to whether the deal goes ahead.

The fee depends on the scope, the size of the business, the number of entities and years covered, and the timeline. We quote a fixed fee after a short discussion of the deal and the information available, and we can phase the work so that a red-flag review comes first.

An executive summary of the key findings and their deal impact, followed by sections on the business overview, quality of earnings, net working capital, net debt and debt-like items, tax, statutory compliance, and contingent liabilities, with suggested price adjustments, conditions precedent and indemnities.

They give the buyer grounds to reduce the price, hold back part of it in escrow, ask for specific indemnities and warranties, make the seller fix issues before completion as conditions precedent, or walk away. Without due diligence, the buyer only has general warranties to rely on after the money has been paid.

Yes. We sign a non-disclosure agreement before receiving any information, work through access you control, restrict the data to the engagement team and use it only for the agreed purpose. Sensitive information can be shared in stages as the deal progresses.