APA Group (APA) Australia’s largest natural gas infrastructure business owning more than $ 12 billion of energy assets announced in April 2013 that it will not progress to acquire Envestra without due diligence. “Until we get access to due diligence, we’re not going anywhere,” Mr. McCormack, Managing Director of APA Group said of the present status of the approach to Envestra share. “We remain open to discussion if Envestra wants to do so in due course”. The pipeline operator is offering 0.1678 APA per share for every Envestra share. We have heard of the term “due diligence” quite often by companies, auditors and promoters or the board of directors, but what does the term mean and why is due diligence undertaken by companies?
Due diligence is the process of evaluating a prospective business decision by getting information about the financial, legal and other aspects of the other party, it is done when buying a business, the buyer spends time going through the financial condition of the business, customer records, legal obligations and other documents. This process is carried out because the prospective buyer wants his/her opinion of the business to see whether the decision is good. The term due diligence is a legal term borrowed from the securities industry and it is undertaken to avoid any pitfalls when acquiring a company and to make sure all the records of the firm are available and have been independently verified, in some respects it is similar to an audit. When due diligence is undertaken all the documents of the firm are assembled and reviewed, inputs from the management are taken into consideration and a team of financial experts, lawyers and accountants descend on the firm to analyze it.
Who undertakes “due diligence”?
Buyers will usually involve professional advisors to assist in the due diligence process, the due diligence team will include accountants ( to investigate financial data such as balance sheet, profit and losses etc), lawyers ( to assess the legal, contractual and mandatory compliance issue) and specialists relevant to the industry or market sector in which the business operates.
Due diligence is a process which includes detailed review of all aspects of a business or a situation including financial, legal, insurance, technology, competitors as well as general company information. The process involves the investor, accountant and an attorney. In a business purchase, it is usually performed after the intent to purchase documents has been signed but before the formal purchase agreement. During the process of due diligence the company should appoint a person as a due diligence co-ordinator who undertakes to interface with the team, collect all materials required by the due diligence team and oversee activities in the process. A due diligence team shall prepare the plan in key areas such as marketing, legal, financial, controls and technical.
The Marketing plan includes the following details:
- Brief history, vision, statutory compliances and growth trajectory
- Details on the company’s products and services, manufacturing details, uses of the products and services to the consumers
- Guarantee and Warranty conditions
- Comparison of the company’s products and services to those of competitors, difference in pricing etc.
- Area of market segmentation
- Strengths and weaknesses of the company relative to the competitor
- Sales strategy like advertising campaigns etc.
- Customer after sales service
- Name and registered owners of the company
- Copies of memorandum of association ( if applicable), tax paid details etc
- A list of lawsuits filed against the firm ( if any) and their jurisdiction
- Copy of licenses, copyrights, patents granted to the firm
- Legal opinion on the licenses, copy rights and the lawsuits filed and verify the impact of such law suits (whether it will have an impact on the functioning of the company in the longer/shorter run)
Income statements of the firm, Audited balance sheets, cash flow statements
- Method of accounting adopted
- Payment terms, collection of debts
- Monitoring of sales
- Monitoring of orders and shipments
- International accounting standards followed
- Cost accounting system
- Names of the banks that the company deals with and their credentials
- Frequency of internal audits and procedures
- Frequency of external audits and procedures
- Description of the manufacturing process
- Suppliers of equipment, software, services
- Human resources and infrastructure
- Import restrictions or licensing (if applicable)
- Environmental issues and how they are addressed