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Audit & Assurance

Financial Due Diligence

Due Diligence

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Overview

Financial due diligence is the buyer's verification of a target company before a transaction — and it is the professional filter that separates a priced deal from a gamble. The diligence examines the target's books under Section 128 of the Companies Act 2013, its tax records and exposures under the Income Tax Act 1961, its working capital, its debt, and the sustainability of its earnings. The output is a report that tells the buyer what the seller's numbers actually mean — and what to pay for them.

The distinguishing work of diligence is testing quality, not quantity. Revenue is examined for sustainability — customer concentration, contract renewals, one-off sales. Profit is examined for adjustments — related-party pricing, abnormal expenses, non-recurring items. Liabilities are examined for what is missing — undisclosed tax demands, pending litigation, statutory defaults. Each finding either adjusts the price or the structure, and each is a negotiation in itself.

The cost of a poor or skipped diligence is paid asymmetrically: the seller knows the business, the buyer does not. An overstatement found after closing is a loss the buyer owns; an undisclosed tax demand surfaces years later with interest. The diligence report is also the buyer's warranty evidence — the seller's representations are read against what the diligence found.

This service is for acquirers, PE and VC investors, and lenders performing financial due diligence on targets. We design the diligence around the deal's key risks, examine the financials, tax and compliance positions, quantify the adjustments, and deliver a report that supports the price, the structure and the warranty schedule.

How It Works

  1. 1

    Risk-Based Scoping

    We design the diligence scope around the deal's key risks and the target's profile.

    Harun Raaj & Associates does this2-3 days
  2. 2

    Financials & Records Review

    We review the target's accounts, records and tax files under the statutory frameworks.

    Harun Raaj & Associates does this1-2 weeks
  3. 3

    Earnings & Liability Testing

    We test earnings quality, working capital, debt, contingent liabilities and tax exposure.

    Harun Raaj & Associates does this1-2 weeks
  4. 4

    Adjustments & Valuation Impact

    We quantify the findings and their impact on the valuation and deal structure.

    Harun Raaj & Associates does this1 week
  5. 5

    Report & Warranty Support

    We deliver the diligence report and support the price and warranty negotiation.

    Harun Raaj & Associates does this1 week

Frequently Asked Questions

What financial statements and records do you examine during a buy-side due diligence engagement?
A buy-side financial due diligence engagement covers at minimum three years of audited financial statements prepared under Schedule III of the Companies Act 2013, along with the corresponding Form 3CD tax audit reports filed under Sec 44AB, IT Act 1961 (≡ §63, IT Act 2025) of the Income Tax Act 1961 (≡ §63, IT Act 2025). We examine revenue recognition policies against Ind AS 115, inventory valuation methods, related-party transactions disclosed under Ind AS 24, and contingent liabilities. Working capital trends are stress-tested using the actual debtor ageing, creditor terms, and stock turnover ratios. The objective is to identify normalised EBITDA, off-balance-sheet exposures, and any restatement risk before the buyer commits to a valuation.
How do you assess tax risk during financial due diligence on a target company?
Tax due diligence begins with a review of income tax returns for the last six assessment years, reconciling book profit with taxable income and examining the Form 26AS / AIS for any unreconciled TDS credits or high-value transaction flags. We look for unexplained additions made by the Assessing Officer under Section 69 or Section 68 of the Income Tax Act 1961, pending appeals before the CIT(A) or ITAT, and any Section 143(2) notices still open. Transfer pricing documentation under Section 92D and Form 3CEB is reviewed where the target has international transactions. Deferred tax assets — particularly MAT credit entitlement under Section 115JAA — are verified for recoverability against projected profitability.
What GST-specific risks do you look for in a target company's books during due diligence?
GST due diligence focuses on reconciliation between GSTR-1, GSTR-3B, and the audited revenue figure, as well as the GSTR-2B input tax credit (ITC) matched against the books. We assess the risk of ITC reversal demands under Section 16(2)(c) of the CGST Act 2017, particularly where vendors are non-filers or have cancelled registrations. Classification disputes — especially between goods and services, or between different HSN/SAC codes — are reviewed against the rate notifications issued under Section 9 of the CGST Act. Pending GST audit observations under Section 65 or scrutiny notices under Section 61 are quantified as contingent liabilities. For targets in manufacturing, the transitional credit claimed under erstwhile Form TRAN-1 is verified against the then-existing CENVAT balances.
What is your deliverable format for a sell-side due diligence report, and how is it used in a fundraising process?
A sell-side due diligence report (also called a Vendor Due Diligence or VDD report) is structured around Schedule III financial headings and presents normalised financial statements for three to five years, with clear adjustments disclosed and footnoted. The report is addressed to the management of the target company and is shared with potential investors under a reliance letter that extends contractual comfort to named parties. It is typically used alongside a draft Information Memorandum in Series A/B fundraising rounds or PE transactions to reduce the buyer's own diligence timeline and increase process control. The report flags quality of earnings adjustments, working capital peg methodology, and known litigation or contingency, allowing the management to address weaknesses proactively before buyer scrutiny.
How long does a financial due diligence engagement typically take, and what access do you need from the target?
A standard buy-side financial due diligence engagement for a mid-market target (turnover INR 10–200 crore) typically takes 3–6 weeks from the date of data room access. We require a structured data room containing audited financials, board resolutions, MCA filings (particularly Form MGT-7 and AOC-4), bank statements, debtor/creditor schedules, statutory registers, and all tax assessment orders. The timeline compresses to 2–3 weeks when management provides a well-prepared data room with indexed documents. Any delays in furnishing records — particularly correspondence with the Income Tax Department under Section 148 re-assessment or GST SCNs under Section 73/74 — proportionately extend the timeline. We issue a diligence checklist at engagement start so the target's finance team can begin preparation in parallel.

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