Due diligence is essential before buying a business, taking investment, or entering major partnerships. Learn what to check and how to protect your interests.
Financial Due Diligence
Review at least 3 years of financial statements. Verify revenue streams and profit margins. Check for undisclosed liabilities, pending tax assessments, or contingent liabilities.
Accounts receivable aging shows collection efficiency. Inventory valuation affects business value. Verify all loans, advances, and guarantees disclosed match actual records.
Legal Due Diligence
Verify company registration and MCA records. Check for pending litigations, statutory defaults, or regulatory notices. Review all material contracts, leases, and agreements.
Confirm ownership of assets being purchased. Check for encumbrances, mortgages, or hypothecation. Verify intellectual property ownership and any pending infringements.
Operational Due Diligence
Assess key customer concentration risk. Evaluate employee contracts, ESIC, PF compliance. Review supplier agreements and any exclusive arrangements.
Physical verification of assets and inventory is crucial. Understand operational processes and dependencies. Identify any environmental or regulatory compliance issues.
Red Flags to Watch
Revenue suddenly increasing without operational explanation. Related party transactions without clear business rationale. Frequent changes in auditors or management. Inconsistencies between filed returns and financial statements.
GST returns not filed or mismatched with books. Employees classified incorrectly to avoid statutory obligations. Assets valued significantly above market rates.
