Friday, November 20, 2020

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.


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.



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.



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 / 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.




Detailed monthly revenue trend of the Historical Period for each revenue line along with key drivers of revenue.

a . Commercial contracts / agreements that are linked to revenue (one time or recurring).

b. Qualitative and quantitative revenue data which should include but need not be limited to areas such as:

Revenue breakup based on contract length

One time revenue and recurring revenue

Repeat customer revenue and new customer revenue

Geographical split

Domestic Vs International

c. Provide Sample invoice raised and major contracts by the company on various parties, provide different bills having different components/ services which are provided by the company. Note on the process of billing and computation of commission income on a sample basis

Details of customer benefit policies impacting the revenue of the Company, i.e. special discounts, any other terms / conditions


Employee Cost & Other Related Details

a. Salary register containing details of all salaries paid for employees in the historical period. The salary register should have all details like salary breakup in components (Basic, DA, Allowances), PT, TDS, Reimbursements amongst others. The details should match with the accounting records of the Company.

Please provide sample copies of appointment letter, employment agreements, non - compete agreement, details of bonus, incentives, performance matrix for sample employees

b. Details list of Employees who were/are involved in the product development and provide copies of Confidential Information & Invention Assignment Agreements entered with them.

c. Copies of Employee Innovation & Proprietary Information Assignment Agreements, if any.

d. Details of contract labour (payment, aggregate workers, compliance to any law, deployment). (if, any)

e. Details of compensation and ESOPs to the promoters and key management team.

f. Salary advance policy if any

g. Org chart indicating breakdown of employees by key departments/teams

h. Indication of departments/teams where additional employees will be hired in the coming few months, and the nature of talent being hired



a. Details of offices along with rent / lease agreements, purpose of office i.e. Registered Office / Corporate Office / Branch / Sales Office

b. Details of operating leases and finance leases entered into by the entity in the historical period with details of leased property, area, lease rentals, lease period and lease escalation and termination clauses.


Professional fees

a. A List of law firms, accounting firms, consulting firms and similar professionals or experts engaged by the company detailing service availed and amount paid for it along with contracts where executed

b. Invoices for the sample cases


Marketing / Business promotion Expenses

a. Monthly trend in marketing costs along with description on how marketing costs are helping in acquisition of customers

b. Breakdown of sales expenditure (between customer acquisition & customer support) on a monthly basis, for the last 12 months

c. Breakdown of customer onboarding costs incurred on a monthly basis, for the last 12 months

d. Marketing expense budget of the company. Also to provide budget v/s actuals for the same.


Technology cost & IPR documents

Details of technology costs incurred by the company during the historical period, including

a. Cost of equipment, servers, service contracts etc.

b. Cost of building up of App and website / domain

c. Cost of web storage space / online tools used

d. Details on Intellectual Property developed by the Company /Founders/Key Employees and documents pertaining to registration of Intellectual Property


Other expenses

a. Details of customer compensations / claims paid and disputed during the historical period, if any; include all instances of rebates/discounts given due to product downtime or support issues.

b. Discount policy of the company for bulk orders

c. Details of exceptional, prior period or non-recurring items of income and expenditure.

d. Invoices for the sample cases

e. Any other agreements with vendors (i.e. payment gateways, marketing agencies, bankers, investors, etc)



Fixed assets

a. Fixed asset register as on 31st march [PY] and till date

b. Listing of assets (property and equipment) acquired on lease and lease agreements. Note on lease accounting.

c. Details of charges or lien created against any fixed assets through guarantees or loan arrangements.

d. Details of any intangible assets (also inhouse development expenses) and any expenses capitalized during the historical period


Receivables and advances

a. Details of Debtors/advances given, ageing of accounts and expected realisation and details internal system follow up. Confirmations for over and above Rs.1lakhs

b. Details of Advances/ Deposits given, Description/ Nature of the advances given for.

c. Details of Bad debts or provision for bad debts

d. Details of credit period given to debtors


Cash and bank

a. Details of all the bank accounts, bank statements (in PDF only/ authorized by bank) till date. Bank loan statements and sanction letters, if any

b. Details of Bank overdraft/ Term loans and Term deposits in tabulated form having date of deposit and maturity, interest etc.

c. Monthly bank reconciliation statement for all the banks.

d. Credit card statement and credit policy

e. Details of any type of prepaid corporate credit cards, issued to employees.


Current liabilities and provisions

a. Details of Creditors/advances taken, ageing of accounts and expected realisation and details internal system follow up. Confirmations for over and above Rs.1lakhs

b. Details of Deposit received from Customers/ parties. Nature of the same.

c. Details of leave pay and retirement benefit accruals. (provide actuary report for gratuity, if any)

d. Any other payables or Outstanding govt. dues


Borrowings and debts

a. Schedule of borrowings (secured and unsecured) segregated into short term and long term debt indicating lender, limit, drawdown to date, repayment terms, interest rates, security etc. Details of default in repayment of loans and interest, if any.

b. Copies of loan agreements / sanction letters

c. Repayment schedules, as currently applicable for each of the loan account indicating principal and interest details.

d. Computation of provision for interest as for outstanding loans as at [.]

e. Purpose for which loan is taken and utilized.



a. Details of Investment other than Term deposits/any other liquid funds, made by company

b. Balance confirmations statements for the above.

c. Reconciliation of amount appearing in balance confirmation with books of accounts in terms of amounts recognised as income and asset (ledger wise) .


Related party transactions

a. A list of related and affiliated entities, specifying the extent and nature of the relationship with such entities and their management.

b. Provide details of transactions with each related party during the financial year

c. Details of any exposures on account of related parties like guarantees, asset security etc, if any.

d. Details of past dues of related party written off by the company, if any.


Shareholding of the Company /Sister Concerns/ etc & Shareholders Agreements (including related documents)

a. Details of shareholding at the time of inception, current shareholding pattern and post investment shareholding

b. Investment Agreements executed by the Company since inception, Share Purchase Agreements, Valuation Report, FCGPR & FCTRS filed, if any.

c. List of Sister concerns /holding and subsidiaries along with ROC Master data

d. ESOP policy/ trust, and list of ESOPs given to employees granting date, vesting period in tabulated form



Direct Taxes

a. Computation for PY and current Year, income tax returns & acknowledgements and notices received from income tax depts, if any

b. 26AS form for the past three years

c. Details of TDS deducted and paid. (i) Acknowledgments copies of TDS returns, (ii) challans (iii) workings for all the quarters, (iv) reconciliation with the books of accounts and (v) notices received from the dept., if any

d. Deferred tax workings, MAT workings, Amt workings for the previous audited financial year, if any

e. Tax Audit reports for period of review

f. 15CA/ CB forms for non domestic transactions

g. Equalization levy (payment of 6% taxes on advertisement above Rs. 1,00,000 in non domestic transactions)

Details of parties and amount paid, workings and challans

h. Annual returns/ SFT's filed by company.


Indirect Taxes

a. VAT

Details of (i) vat workings, (ii) vat returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


b. Service tax

Details of (i) Service tax workings, (ii) Service tax returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


c. Goods and Service Tax (GST)

Details of (i) GST workings, (ii) GST returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


Labour Law Compliances

a. ESIC (applicable on if more than 10 employees and having wages less than Rs. 21,000/-)

Details of (i) ESIC workings, (ii) ESIC registers and returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


b. PF (applicable if 20 or more employees drawing salary less than Rs. 15,000)

Details of (i) PF workings, (ii) PF registers and returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


c. PT (applicable for all the employees including director and company- state wise applicability)

Details of (i) PT workings, (ii) PT registers and returns, (iii) challans (iv) reconciliation with books of accounts and (v) notices received from dept, if any


d. Payment of Bonus Act (applicable if 20 or more employees drawing salary less than Rs. 21,000)

Details of (i) Bonus workings, (ii) Bonus registers, forms and returns, (iii) Any exemption enjoyed by the Company and (v) notices received from dept, if any