Financial, Tax & Compliance Due Diligence

What is due diligence?

Due diligence is a detailed examination of a business before someone invests in it, acquires it, or lends to it. Financial due diligence looks at the quality of earnings, the real state of the balance sheet, working capital, and debt. Tax due diligence looks at tax exposures — direct, indirect, and international. Compliance due diligence checks whether the business has met its corporate, regulatory, and labour obligations.

The findings shape the price, the deal structure, the warranties and indemnities in the agreement, and sometimes whether the deal happens at all. Founders can also commission vendor due diligence on their own business before going to market.

The key terms

A few concepts come up in every diligence:

Quality of earnings

Adjusting reported profit for one-off, non-recurring, or unsupported items, to show sustainable earnings.

Normalised working capital

The level of working capital the business needs to run normally, often used to adjust the purchase price.

Net debt

Borrowings and debt-like items — like unpaid statutory dues or deferred payments — less cash. Often deducted from the price.

Tax exposures

Past tax positions that could result in demands: disallowed expenses, GST credit issues, TDS defaults, transfer pricing.

Red flags

Findings serious enough to affect the deal: undisclosed liabilities, revenue that doesn't hold up, compliance breaches.

Warranties and indemnities

Protections in the transaction documents, often drafted around diligence findings.

Vendor due diligence

Diligence commissioned by the seller before a sale, so issues are found and fixed or disclosed on the seller's terms.

Why it matters

Diligence is where the story meets the evidence:

Price

Adjustments to earnings, working capital, and net debt feed directly into what's paid.

Hidden liabilities

Tax demands, statutory dues, and contingent liabilities often surface only in diligence.

Deal structure

Findings shape escrows, deferred payments, conditions precedent, and indemnities.

Regulatory compliance

Gaps in ROC, FEMA, or labour compliance can delay or block a deal until fixed.

Integration planning

For acquirers, diligence shows what needs fixing after closing.

Seller readiness

For founders, knowing what buyers will find avoids a late-stage price cut.

Lender comfort

Lenders funding acquisitions rely on diligence findings.

Who is this for?

Legal due diligence — on title, contracts, litigation, and IP — is usually done by lawyers alongside financial and tax diligence.

Types of due diligence

The workstreams cover different ground:

What we'll need from you

Financial statements

Audited accounts for the last three years, and recent management accounts.

Tax records

Income-tax returns, assessments, GST and TDS returns, and notices.

Corporate records

MCA filings, registers, minutes, and shareholding history.

Contracts

Key customer, supplier, lease, and loan agreements.

Employee data

Headcount, payroll, PF and ESI compliance, and ESOPs.

A data room

An organised, access-controlled place to share documents.

Scope and fees are agreed based on the size of the target and which workstreams are needed.

How due diligence works

A typical engagement runs like this:

1. 1

   Agree the scope

   We agree which workstreams, periods, and areas matter most for the deal.

2. 2

   Information request

   A detailed request list goes to the target, and documents are shared in a data room.

3. 3

   Analysis

   Financials, tax positions, and compliance are analysed, and questions raised with management.

4. 4

   Management meetings

   Key issues are discussed directly with the target's management.

5. 5

   Findings and quantification

   Findings are quantified where possible and rated by significance.

6. 6

   Report

   The report sets out findings and their implications for price, structure, and documentation.

After the diligence

Findings are put to work in the deal:

Price adjustments

Earnings, working capital, and net debt findings feed into valuation and completion mechanisms.

Specific indemnities

Known exposures are covered by specific indemnities or escrows.

Conditions precedent

Fixable issues, like pending filings, are made conditions before closing.

Disclosure

Sellers disclose known issues against warranties.

Post-closing plan

Acquirers plan how to fix compliance gaps after closing.

Keep records

Keep the diligence report and data room records in case of later claims.

Benefits and responsibilities