Due Diligence refers to a comprehensive appraisal of a person or business undertaken by a prospective seller/buyer, prior to signing a contract, especially to establish its assets and liabilities and evaluate its commercial potential. It is a process of thorough and objective examination that is undertaken before entities enter into major transactions. It is an act with a certain standard of care and one of its key objectives is to minimize, to the maximum extent practicable, the possibility of there being unknown liabilities or risks. The exercise is multi-dimensional and involves investigation into the business, tax, financial, accounting and legal aspects of the entities involved. It can be a legal obligation, but the term most commonly applies to voluntary investigations.

In a time when off-shoring is attracting scores of opportunities with companies seeking foreign businesses, due diligence has become a necessity more than ever. Due diligence is crucial for a company expanding internationally as up-to-date market intelligence is essential for the business to target the best international market opportunities and make informed business decisions when evaluating potential overseas business partners. Due Diligence of international buyers is required if a business wants to avoid the risk of ending up without the product or without money or without both when doing international trade. International trade scam and fraud is on rise with development of digital technologies. Due Diligence, in this scenario, involves multiple checks on the individual or the company that the company’s intends to deal with to make sure that the individual or the company are who they claim they are. It will comprise of a comprehensive investigation of the capabilities, legitimacy and financial strength of a potential international buyer while relying on useful informal gleaned from government, industry and financial contacts, the local press and other sources. The business will seek sufficient information to enable it to make a decision as to whether to proceed with the transaction, and if so, at what price.

The due diligence process usually commences with a preliminary questionnaire being sent to the proposed buyer. This questionnaire will seek to identify and evaluate the commercial and legal matters which are material to the decision whether or not to proceed with the business proceed. It will typically involve a thorough examination of the following aspects of a potential buyer’s affairs:

1.Credit Check:A check performed on the credit worthiness of the international buyer to ensure that it has the means necessary to cover its leveraged positions in the trade. The assessment of creditworthiness can be undertaken on the domestic business’s behalf by a local reference agency.

2. Background Check:A background investigation to look up on the public records of the international buyer along with a commercial assessment consisting of a review of the industry, market, and business model of the buyer.

3. Reputational Check:Review the reputation of the buyer along with that of individual counterparties. The help of the local agency can be taken to collect press cuttings and other published materials about the potential buyer’s past activities. A local accountant might be able to arrange for a technical expert to appraise the caliber of the firm’s managerial, technical and marketing capacities.

4. Reference Check:Contact employers, associates and other connections of the potential buyer to verify qualifications or credentials. Reference can be taken from the buyer’s bankers and from with which the buyer in question already has a credit account.

5. Criminal Record Check:An investigation of the foreign buyer’s criminal history.

6. Legal Due Diligence: A review of documentation to identify potential legal issues that may be risks/impediments to the transaction or in the general operation of the Buyer that may affect the value or consideration in connection with the transaction.

7. Restricted Parties Record Check:A check to determine whether the international buyer features on any “denied parties” lists.

8. Financial Health Check:Investigation on the buyer’s commercial and financial records comprising review of tax, financial position, policies and internal controls.

9. Personal Visit of Buyer’s Premises:Trips to foreign markets can be undertaken to establish personal rapport with overseas buyers. This can help attain first-hand information regarding the market and the customers as well.

10. Mystery Shopping with your Foreign Buyer:Verification of the legitimacy of the transaction.

Criteria for making the final choice should include the following:

  • Whether the international buyer is genuinely interested in the proposed venture rather than seeing it as just another deal
  • The potential buyer’s ability to understand the nature of transaction
  • How easily the business will be able to communicate with the buyer.
  • Whether the prospective buyer’s proposal has a strategic fit with the domestic business’s requirements.
  • How closely can the international buyer’s activity be monitored.

The findings from the due diligence can normally affect the deal structure, as well as the contents of the transaction documents, particularly as regards condition precedent, specific representations and warranties and indemnities, revisions to the existing internal corporate acts, etc. An international business in India can leverage the knowledge and resources of the Government of India by tapping into its vast network of experts, contacts and resource organizations like the Export Promotion Council (EPC), Commodity Boards, Federation of Indian Export Organization (FIEO), Indian Institute of Foreign Trade (IIFT), Indian Trade Promotion Organization (ITPO), Indian Embassies Abroad, Foreign Embassies in India, Import Promotion Institutions Abroad, Overseas Chambers of Commerce and Industries, Various Directories, Journals, and Market Survey Reports. Addresses of prospective international buyers of a commodity can, moreover, be selected or verified from these credible sources.

The Due Diligence process should be followed by the Buyer Management process involving the following steps:

  • Identify potential buyer/customers
  • Procure orders
  • Agree upon crucial points of Pricing, Freight charges and Payment terms
  • Sign the Contract
  • Manage production and suppliers
  • Resolve quality issues
  • Delivery of goods and follow up
  • Realization of Payment

All aspects of an export order in respect of items, specification, pre-shipment inspection, payment conditions, special packaging, labeling and marketing requirements and delivery date, marine insurance, documentation etc. should be carefully examined by the seller/export business. Only if there is satisfaction on all these aspects, a formal confirmation should be sent to the buyer, otherwise clarification should be sought before any confirmation. There should be no ambiguity in the export contract pertaining to the exact specifications of goods and terms of sale including export price, mode of payment, storage and distribution methods, type of packaging, port of shipment, delivery schedule etc that could lead to any dispute in the future.

All in all, continuous due diligence for all aspects of an international transaction is imperative for a successful international expansion of any business. To mitigate the ‘delivery’ risk, companies should perform appropriate due diligence investigations during buyer selection and establish robust agreements incorporating protective clauses to guard against disruptions.