What is Due Diligence? Explain due diligence with example.

Definition of Due Diligence

Due diligence is the process of collecting the information of a company and perform a detailed and sufficient research, investigation, verification, and review of all the legal documents of a business before taking any decision or action to make sure the risks are tolerable.

These risks associated with the company’s legal structure, tax compliance, employees, customers, market or assets and liabilities. It is an important work process that requires being extra vigilant, cautious, and well-acquainted so that mistakes can be avoided.

Kinds of due diligence

Kinds of Due Diligence

It is more or less lengthy and stringent process that helps in assessing the claims made by a target company about its business, capabilities, finance and assets. There are different types of due diligence that help in evaluating each and every aspect of a business in detail.

The common types of due diligence are:

  1. Administrative Due Diligence
  2. Asset Due Diligence
  3. Taxes Due Diligence
  4. HR Due Diligence
  5. Intellectual Property Due Diligence
  6. Legal Due Diligence
  7. Financial Due Diligence etc.

The detail discussions of above types are enumerated as follow:

  1. Administrative Due Diligence:

“Administrative Due Diligence Report” clarifies the admin-related items such as facilities, occupancy rate, number of work stations etc. It can give clarity to the buyer about the operational costs and general costs that may be incurred in running the business.

2. Asset Due Diligence:

Assets Due Diligence Report provides the details of a business’s fixed assets and their locations, lease agreements, schedule of sales and purchases of major capital equipment’s during the last 3-5 years, real estate deeds, mortgages, title policies, and use permits.

3. Taxes Due Diligence:

Details information regarding the taxes of the company is provided. Details information means taxes payable, basis of calculation, pending case against the company relating to tax etc.

4. HR Due Diligence:

Human resources Due Diligence involves forming a report on the following aspects of the business:

  • The number of total employees, vacancies, employees due for retirement, on probation and serving notice period.
  • Salaries and bonuses paid.
  • Employment documents such as employee agreement, NDA, Non-Solicitation and Non-Competition Agreement, etc.
  • HR policies or procedures of the company.
  • Past and ongoing employee disputes, complaints of sexual harassment at workplace, discrimination, etc.
  • ESOP plan of the company

5. Intellectual Property Due Diligence:

IP due diligence, reports on the quantity and quality of Intellectual properties owned by the company. It provides detailed information about the following:

  • Patents owned and patent applications filed by the company.
  • Copyright owned by the company.
  • Trademarks and designs owned by the company.
  • Pending IPR infringement case by or against the company.