Financial Due Diligence Checklist

While investing in a business or a start-up, there is a due diligence process, which primarily has two parts, viz. Financial Due Diligence (FDD) and Legal Due Diligence (LDD).

Here's a basic checklist that we use during the Financial Due Diligence process as a preliminary list of requirements.

GENERAL INFORMATION

Business Presentation

Description / details on the following (if not covered in as much detail as part of Business Presentation mentioned above):

a. Detailed description of the business model of the Company including business verticals of the past and present and verticals that the Company plans to cater to in the near future post investment.

b. Revenue Streams (past, current and future revenue streams, include description of all revenue streams to be captured)

c. Areas of Focus – Target Customer types (include segmentation undertaken based on size, needs or other criteria)

d. Detailed description of the product offerings provided, including breakup of margin % earned on each product offered

e. provide a list of all existing and under development products and services & its versions, along-with timelines.

f. List of large / key customers (cumulatively accounting for at least 50% of current revenues) and their product usage patterns (over the past 12 months). If the Company is consumer / user based company, please provide details of user data (e.g. DAU, MAU, No of registered users, CAC, user churn etc)

g. List of Key Vendors and Partners and a brief on transactions with these parties

h. List of Competitors in India and globally

i. Description or copy of company's purchasing policy, credit policy

j. All surveys and market research reports, done by the company (For E.g. Weblinks of articles and press releases etc)

k. Key areas that the Company faces challenges in when running and growing the business and the action plan to address these.

BASIC REGISTRATION/OTHER SPECIFIC DOCUMENTS

Certificate of Incorporation, MOA and AOA.

Copy of PAN, TAN, Registration Certificates of VAT, Service Tax, GST, Excise, PF, ESIC, PT, Shop and Establishments for all premises used, IEC code, and any other registration certificate as applicable to the company

Descriptive list of all significant acquisitions, restructurings, reorganizations, spin-offs and other transactions (intercompany or otherwise) not in the ordinary course of business which have occurred in the Company history.

Copies of any letter rulings, non-privileged tax opinions obtained for all such transactions.

FINANCIAL STATEMENTS/REPORTS & MIS INFORMATION

Signed Audited Financial statements along with, annexures, notes to accounts, trial balance, audit reports, CARO report, cash flow statements and any other report that forms part of the annual financial statements for Target Company for the Historical Period (from Inception till last financial year for which audit has been completed).

Unaudited financials for that part of the Historical period where audit is not complete.

Accounting Data for the Historical Period that matches the audited and unaudited financials as provided above. (Tally Backup / Quickbooks login / Xero.com Login or any other accounting software used for the historical period)

Internal Audit Reports (if any)

Management letters issued by the auditors during the historical period

Transfer Pricing - Provide copy of Form 3CEB filed, Transfer Pricing Study Report, Inter-Company agreements, Arm’s Length Pricing workings, if any.

MIS prepared, key KPI's for the Historical Period. (Customer Acquisition cost, Life Time Value, Product wise bifurcation, No of bookings and customers, Average cost etc). Where for any reason MIS and financial accounting data do not match, please provide reconciliation statements.

Co-Founder Selection Questions

A number of co-founders visit us regularly, asking for a company to be incorporated as they have a shared passion for a novel business idea, commercializing a pet project, or the will to use their spare time to start a side stream of income.

A number of times though, we've seen such partnerships not go through beyond a year or two due to rising cultural or ambition related differences between the two.

The importance of Term Sheets and Co-Founder Agreements notwithstanding, it's important that the two founders come on the same page in spirit for the benefit of the business.

Based on our experience, here are a few things that you must discuss with your co-founder when you think you've found the one.

1. Skills

a) List down your skills, achievements, and study each other's sincerely drafted work CVs

b) List out respective areas of strength - areas where you complement and/or differ from each other

c) Divide functions between yourselves in a way that you know how your functions are inter-connected, but who shall be in-charge of which function.

d) Answer to yourselves about if you genuinely feel your co-founder is amazing and you're excited to be working with them.

e) Do they like to do tasks that you dislike and vice-versa? Do they make up for your weaknesses?

2. Entrepreneurial Experience

a) Whether they have founded any venture in the past?

b) Have they been a part of an early team within an entrepreneurial venture that belonged to them or to someone else?

c) What happened of that venture? What is the sense of ownership that they have towards that venture and its results (success or failure, both)?

d) Are your independently made business plans with financial figures and timelines in sync? Can you both agree on a mutual philosophy and decide on one plan?

New FoSCoS Portal for FSSAI Registration

The Food Safety and Standards Authority of India (FSSAI) has launched Food Safety Compliance System (FoSCoS) to be applicable across India with effect from 01-Nov-2020. The portal can be accessed at http://foscos.fssai.gov.in.

It replaces the existing Food Licensing & Registration System (FLRS) which was accessible at http://foodlicensing.fssai.gov.in.

Users of the FLRS may use their existing credentials to log in to the FoSCoS portal.

User Manuals and Video Tutorials on the portal can be accessed here: https://foscos.fssai.gov.in/user-manual. 

Reference

FSSAI Order No. 15(31)2020/FoSCoS/FSSAI dated 12th October 2020