India is a unique country. With a population of close to 1.5 billion, coupled with infrastructure availability & lower wage rate, the country represents unlimited possibilities for almost every type of business.
At the same time, India is still an unknown territory for many buyers looking to acquire local targets. So conducting thorough research and taking on due diligence consultants to look into potential targets is crucial – and a lack thereof can land you in hot waters easily.
So, before entering into any transaction with a company, either a buy-transaction or a sell-transaction, proper vendor analysis becomes especially relevant.
In this blog, I will be mentioning a list of steps required to be undertaken for assessing any target company. During my experience with companies of varying scale (Turnover between 1 Million USD – 500 Million USD), I have used this list below to understand potential target companies better.
The first step is to gain preliminary data about the target company. Preliminary information includes information as to the Company Paid Up Capital, Director Info, Existing Charges of the company, Directors, and their involvement in other concerns. Please find enclosed the links below for this purpose.
This information can be found via the Indian Ministry of Corporate Affairs, short MCA. I use the following tools to research for the preliminary analysis:
- Basic Information of the company
- Charges Detail (Borrowings which have been secured by a collateral)
- Details about the Directors
Much like in other countries, you can access the financials of the target company from the Ministry of Corporate Affairs of India. Some of the parameters include –
- Sales Growth year on year
- Net Profit Ratio
- Cash Accruals
- Cash Burn
- Gross Profit Ratio
- Net Worth Calculation
Company’s Compliance Proof
Making sure that a company is compliant with regulations is the first step to avoid future mistakes. Under the Indian Goods and Service Tax Laws, the company is required to file its GST Returns regularly. A compliant company seldom delays its return filing. You just need the GST Number of the concern to access such public details on their website.
Company/Directors Prosecution Status
The company is an artificial person but the persons running the show are real. Thus, it is very important that the prosecution status needs to be checked for these directors, to avoid future legal issues.
You can enquire about the status of the Directors via the Director Identification Number (DIN), which can be requested via the MCA as well. Based on that DIN (or the Corporate Identity Number), you can go ahead and check the prosecution status of a potential target’s directors via the MCA website.
Consumer Complaint Status
Verifying the ethical working of the company is very important. The most reliable tool for a first check here is online reviews.
Hence just google the company’s name along with the term “complaints”. This might be sounding funny, but a few complaints coming up are actually considered okay since it is not possible to make everybody happy. However, if complaints are cropping up like water in an ocean, it might be time to take a closer look.
Projected Financials along with Operating Revenues and Profitability is imperative for engaging into a deal with any target company – just like in any other region. Henceforth you should obtain a financial forecasted report from the target company and get it vetted by an expert professional.
The method of share valuation has to be discussed first. There are no significant differences in valuations in India in comparison to other regions, unless in specific cases, where businesses are involved with specific governmental or other regulated sectors.
There are various kinds of valuation available like Discounted Cash Flow, Asset Liability Basis, and much more. The right method of valuation in the majority of the cases is Discounted Cash Flow with realistic assumptions.
Unrealistic sell-side valuations are one of the top killers of potential deals. Much like anywhere else, the biggest problem that arises in the case of ballooned valuations is due to unrealistic assumptions. There is a certain maximum possible growth rate applicable to any industry. If the target company is not taking those assumptions, it becomes a red flag that there is much more turbulence to come at a future date.
Realistic industry growth rates can’t just be pulled from the internet, but have to be seen in context and are best advised on by a professional.
Physical Inspection along with Fixed Assets & Current Asset counting becomes absolutely important since, the actual assets have to match with the books. There has been a number of instances where a forensic audit was eventually required and remarkable details came out at the last stage.
While the overall Due Diligence process in India isn’t different from other regions, it’s important to understand the resources that are available to check for potential risks.