Financial and legal due diligence

Metro Tyres
Aug 8, 2017 · 2 min read

Due diligence — It is the detailed examination of legality and economic attractiveness of a transaction which is preplanned or investment project which permits the person making investment or business partners to take a more knowledgeable study of all the benefits, disadvantages and risks of the corporation.

When a facility owner is replaced, there is a necessity for making an independent assessment of statement of affairs, because of which trust up to certain level is established between the contracting parties and to find a necessary adjustments, trusting upon results and suggestions of experts, to overcome a potential collision of interests and to select a correct form of transaction which would be
ideal for the contracting parties.

Due diligence can be separate down to financial and legal due diligence.

Financial Due Diligence: Financial due diligence is an evaluation of the financial management system of the company inclusive of detailed inspection of the company’s internal control system, document flow, financial statements of the company and management reporting data with handing over of information on the company’s assets and liabilities, profits from primary activities, structure of expense, etc.

It includes:

Examination of availability of assets and liabilities: It includes

  • It analysis the structure of liabilities and assets
  • It examines the current and non-current assets of the business, ascertainment of their value and availability.

Analysis of quality of assets and liabilities: It includes

  • It examines the condition of the assets

Economic analysis: It includes

  • Examines the financial independence and condition of the enterprise
  • Analysis the profits of the enterprise
  • Examines the financial solvency of the enterprise

Tax analysis: It includes

  • Testing of the tax accounting system of the enterprise

Review of cost and management accounting system: it includes

  • Examining accounting policies
  • Ensures the correctness of financial statements

Legal Due Diligence: It is the legal examination of the documents of the company, legal inspection of the accurateness of the business management of the company and ability of its management team.

It includes but not limited to:

  • Inspection of the legality of the procedure of the setting-up of the company, documents of the foundation of the company and authorized capital formation.
  • Examination of the legality of the company management legislative plan
  • Evaluation of the legality of the scope of authority of management team of the company
  • Checking of rights and restrictions of the business

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