Due Diligence is one of the most important steps in an M&A transaction while acquiring a small business. At this stage, the buyer has already made their decision to make the purchase and collected all the necessary financial, compliance, and operational documents and wants to verify the authenticity of the seller’s business.
A due diligence process includes all of the relevant information checks that the buyer needs to conduct in order to validate the documents provided by the seller. These documents include financial statements, operational workflows, compliance issues, litigation documents, employee relations, and many more.
Due Diligence Checklist while acquiring a small business:
By following a due diligence checklist, the buyer can find out more details about the acquiring company. Prior to completing the deal, the seller must comply with all expected business requirements and standards. In case, there are any risks involved in the process then the same should be addressed at this stage.
Here is a checklist to follow for companies investigating the acquisition of small businesses –
1. Business fundamentals
The first obvious step is to get the business name and address. The name and address are key pieces of information that help in establishing the legitimacy of any business. Once you have that in place, find out the proprietor’s name and PAN card number.
- Business name and address
- Business owner names, PAN details, and addresses of the business owners
Broadly, there are two ways of approaching small business evaluation –
- Discrete checks: As the name suggests, a discrete check is performed without your target’s knowledge
- Non-discrete checks: Non-discrete checks require some level of direct contact with the target by way of a site visit or requesting information from the target.
2. Discrete Checks
Buyers perform discrete checks on the available data points respective to the seller’s business. These checks are done in order to validate the information and documents provided by the seller.
The steps in order to carry out Discrete Checks include –
1. Verify the business name through GST data. Fetch GST data from PAN.
2. Verify Business Address through GST data. Fetch GST data from PAN.
3. Bureau ratings – Check if any ratings are available on the business across credit bureaus.
4. Litigations on the business
- Cheque bounce-related litigations
- Debt recovery-related litigations
- Criminal issues
- Corporate insolvency applications
- Consumer Court litigations
5. Media checks for reputation data on the business
6. Media checks for reputation data on the promoters.
7. Social Media checks on the business to identify brand risk
8. Regulator defaulter lists on the business and promoters
9. GST filing history – delays and defaults
10. TDS filing history – delays and defaults
11. EPF filing history if EPF registration exists.
12. Promoter Integrity Due Diligence:
- Cheque bounce-related litigations
- Debt recovery-related litigations
- Criminal issues
- Personal insolvency applications
13. Check if there are any other companies associated with the promoter.
14. Economic Default Checks
- Wilful defaulter
- NPA
15. Check the previous history of presence in shell company databases.
16. Check if incorporation details such as email ids are valid.
17. Check if the incorporation address has been used by other firms
18. Discrete on-site visit
19. Political Exposure Checks on Promoters
20. Sanctions and Law Enforcement Checks on Promoters.
3. Non-discrete checks
A non-discrete check is performed in the presence of the seller, these include –
- Financial Disclosures Checks
- On-site Audit
4. Other data points from Internal systems
Some other data points that can be verified from internal systems include –
- Check if the PIN Code is fraud-prone
- Check if the Promoter or Small business has been internally blacklisted.
Due Diligence is a thorough process that gives detailed information about a seller’s business. Well, though it is one of the most important steps in acquiring any business it can be lengthy and might need a dedicated team to cover all the necessary aspects.
SignalX provides an automated platform that helps companies completely streamline their end-to-end due diligence process. Our platform seamlessly integrates AI and machine learning to provide a consolidated report on all your requirements, so you’re always one step ahead.
With SignalX Pre-Investment Due Diligence solution, companies can –
- Run Financial, Litigation, Compliance, and Reputational Checks on the target company.
- Identify red flags early on and fast-track the deal cycle
- Get the most comprehensive report within 48 hours TAT.
Schedule a call with us today to find out how we can help you with your M&A transaction journey.
Frequently Asked Questions
What would be the 5 five most common challenges of a successful acquisition?
A merger and acquisition transaction involves a lot of activities to manage the data of the acquired company. M&A was never about just acquiring intellectual property, but also migrating and managing the data of the target company.
Therefore, having an integrated system in place is crucially important for the success of the transaction and to keep up with the momentum. Companies certainly face challenges that they need to keep an eye on when having the process of M&A transactions. The five most common challenges of a successful acquisition include –
- Understanding the data of the target company and how to manage and comply with it.
- Managing the data architecture and uncovering of data silos through a data automation program
- Knowing the possibilities of data risks throughout the transactional flow and keeping the data secured.
- Data integration procedure and understanding the type of data to run a smooth operational workflow.
- Analyzation of the data acquired with the help of the right tools and completing a successful M&A transaction.
What are the 3Ps of Due Diligence?
Wealth advisory firms from all around the world, hire wealth managers for consulting investment strategies for their clients. It is very evident that advisory firms cannot be experts in every field and must seek outsourced support to keep their clients satisfied.
For the advisory, it is crucial to have a due diligence process in place in order to identify, evaluate and vet these wealth managers. This is where the concept of the 3Ps comes into the picture which includes,
- People
- Process
- Performance.
The list of the Ps can be extended with Philosophy and Portfolio as well.
How do small businesses do due diligence?
The due diligence process for a small business can be lengthy and complex. Companies need to perform business records check, reference checks, financial health checks, and many other activities.
It is always better to have an automated solution in place that can handle all the checklist necessities while you can make better decisions.
Here is a checklist to go through in a small business due diligence –
- Financial Checks
- Legal Checks
- Operational Checks
- Product Checks
- Employee Checks
What are the three types of Due Diligence?
The types of Due Diligence vary for different business cases and scenarios. Though there can be numerous types of due diligence, from the broader picture point of view the three major types are
- Business DD
- Legal DD
- Financial DD
What are good questions to ask acquisitions?
Having a smooth and successful M&A transaction depends on the types of questions asked. With the right questions in place, one can uncover the type of business they are dealing with, the goals and intentions of that business, how well your company will fit among them, etc.
Here are some examples of good questions to ask acquisitions in an M&A
- Why buy this company and why buy it now?
- How well do you know the seller?
- Does this align with your investment strategy?
- Is there any concern about reputation?
- Is the earnings quality good?
- Does this offer good returns?
- How realistic are the plans and projections?
- How involved are you with your management?
- What are exit procedures?
- Do we need to know anything that is not on the paper?
- How many more offers have you gotten from the market?
- How will the deal be handled?
