A workstream-by-workstream guide covering every check a buyer should run before completing an acquisition — financial, tax, legal, commercial, operational, and India-specific compliance.
Due diligence is the process by which a buyer verifies a target company's financials, tax compliance, legal ownership, contracts, licences, liabilities, customer concentration, operations and promoter dependence before completing an acquisition. In Indian SME transactions, the most important checks include normalised EBITDA, GST and ITR reconciliation, MCA filings, related-party transactions, statutory dues, customer concentration, title to shares, change-of-control clauses and promoter transition risk.
You have signed a Letter of Intent (LOI). The seller has agreed exclusivity. Now the real work begins.
The Information Memorandum was the seller's best case. The management meeting gave you the seller's story. Due diligence is where you test both against evidence — documents, third-party searches, financial analysis, and direct enquiry.
Most deal risk surfaces during due diligence. Buyers who skip it, rush it, or delegate it without oversight tend to discover problems after closing — when the options available are expensive and limited.
Due diligence runs across five parallel workstreams, each led by a different advisor, each producing findings that feed into the others. Understanding who leads what — and why — is the first step to running the process well.
| Workstream | Led By | Key Objective |
|---|---|---|
| Financial DD | CA / Transaction Advisor | Verify earnings quality, cash flows, working capital and liabilities |
| Tax DD | CA / Tax Advisor | Identify GST, income tax, TDS and contingent tax exposures |
| Legal DD | Lawyer / CS | Verify ownership, contracts, litigation, licences and compliance |
| Commercial DD | Buyer / M&A Advisor | Test customers, revenue durability, market position and competition |
| Operational DD | Buyer / Sector Specialist | Assess people, processes, systems, capacity and founder dependence |
The timeline below reflects a reasonably organised seller with substantially complete documentation. Sellers with incomplete records, multiple locations, or pending regulatory matters will typically extend each phase.
| Phase | Typical Duration | What Happens |
|---|---|---|
| LOI signed / exclusivity agreed | Day 0 | Starting gun for formal diligence. Exclusivity period typically 45–90 days. |
| Document request issued | Days 1–3 | Full document request list sent. Data room or shared folder set up. |
| Initial document review | Weeks 1–2 | Financial statements, tax returns, corporate documents reviewed. First issues log drafted. |
| Deep-dive analysis | Weeks 3–6 | Financial, tax, and legal DD running simultaneously. Management Q&A sessions. |
| Commercial / operational DD | Weeks 4–7 | Customer and supplier interviews, site visit, key employee assessments. |
| India-specific checks | Weeks 3–6 | MCA searches, CIBIL checks, GST portal verification, EPFO, sector licences. |
| DD reports issued | Weeks 7–9 | Each workstream delivers findings. Issues log consolidated. |
| Price / terms renegotiation | Weeks 8–10 | Findings translated into price adjustments, indemnities, conditions precedent. |
| SPA negotiation | Weeks 9–14 | Definitive agreement drafted and negotiated, informed by DD findings. |
Formal due diligence is expensive and time-consuming. Before engaging any advisor, ensure your LOI includes a defined exclusivity period — commonly 45 to 90 days in Indian SME transactions — during which the seller agrees not to engage other buyers. Without exclusivity, you bear the full cost of diligence while the seller runs a parallel process.
You will need, at minimum: a CA with M&A experience for financial and tax DD; a corporate lawyer for legal DD and SPA drafting; and a Company Secretary for ROC searches and compliance verification. For sector-specific businesses — pharma, food processing, manufacturing with environmental obligations, technology — also add a sector specialist.
The CA leading due diligence is not your regular statutory auditor. You need someone who has conducted acquisition diligence before and understands normalised earnings analysis, quality-of-earnings reviews, and contingent liability assessment.
Do not let documents arrive informally over email or WhatsApp. Agree on a document request list and a delivery mechanism — a virtual data room (VDR) or a well-organised shared folder with version control — before diligence begins. Agree a delivery schedule and track against it. Selective delays in document delivery are informative in themselves.
Most Indian SME acquisitions fall well below Competition Commission of India (CCI) notification thresholds. As of the time of writing, the thresholds require combined assets exceeding ₹2,000 crore or combined turnover exceeding ₹6,000 crore — a deal value threshold of ₹2,000 crore was also introduced in 2023 for transactions with significant Indian nexus. Always verify current thresholds with your legal advisor before any transaction.
Do not start formal diligence until exclusivity is confirmed in writing. Confirm your CA, lawyer, and CS are briefed and available for the full diligence period before Day 1 — not after the document request goes out.
Financial DD is not the same as reading the audited accounts. An auditor verifies that accounts present a true and fair view under accounting standards. Your job is different: to understand what the business will actually earn under your ownership.
Examine how much reported revenue and profit is recurring, reliable, and genuinely earned. Are revenues recognised at point of delivery or upfront? Are there related-party sales at above-market prices inflating the reported top line? Are there large one-off items — asset sales, insurance receipts — that boost profit in specific years only?
Most Indian SME valuations are based on a multiple of EBITDA. The seller will present a "normalised" figure with add-backs. Some are legitimate: a promoter drawing well above a market-rate salary is a real normalisation. A genuine one-off legal cost is a reasonable adjustment.
"The normalised EBITDA the seller presents and the figure your CA arrives at independently are frequently different. That gap is where a significant portion of price negotiation in Indian SME transactions actually occurs."
Watch for: add-backs described as "exceptional" that appear across multiple years; personal expenses run through the business; related-party costs at above-market rates being added back; and depreciation normalisation that substantially inflates the number. Every add-back should be individually justified with documentary evidence.
Sellers sometimes run down working capital ahead of a sale — collecting receivables aggressively, stretching payables, drawing down inventory — to maximise cash on the balance sheet at closing. If working capital at closing is below the normalised level, the buyer effectively overpays. Negotiate a working capital peg — a target level at closing with a price adjustment mechanism — before signing the SPA.
Map every liability: term loans, working capital facilities, equipment finance, deferred payment obligations, informal borrowings from family members or associates, and guarantees the company has given for third parties. In a share sale, the buyer inherits all of this. Cross-check the debt schedule against bank statements and the balance sheet.
Map every related-party transaction and assess whether pricing is commercial. Related-party revenues that will disappear on Day 1 are not part of the business you are buying — they must not be included in the normalised earnings base on which you are valuing the company.
Cross-check reported revenue and profit against independent data sources. Unexplained gaps between these sources are not bookkeeping errors until proven otherwise:
Do not accept the seller's normalised EBITDA figure without independent add-back verification. Triangulate revenue against GST returns and bank statements before forming any view on earnings quality.
Tax DD is a distinct workstream from financial DD. Its purpose is to identify contingent tax liabilities — taxes that are owed, disputed, or potentially payable — not fully reflected in the audited accounts.
Reconcile Income Tax Returns filed for the last three to five years against the audited financial statements. Material unexplained differences — reported profit significantly higher in the audited accounts than declared in the ITR, or vice versa — require full explanation before proceeding.
Review GSTR-1 (outward supply returns) and GSTR-3B (summary returns) for the last 24 to 36 months. Check whether GSTR-1 figures reconcile with reported revenue. Look for mismatches in Input Tax Credit claimed versus what counterparties have filed. Confirm the absence of outstanding notices, demand orders, or audit proceedings on the GST portal.
Verify that Tax Deducted at Source has been correctly deducted on applicable payments — salary, contractor payments, rent, professional fees — and deposited within required timelines. Outstanding TDS defaults attract interest and penalties and constitute a contingent liability that transfers with the shares.
Review the company's tax correspondence and check the TRACES and ITD portals for outstanding demands. Any pending demand not fully provided for in the accounts should be quantified — and a specific indemnity negotiated in the SPA to cover any crystallised liability post-closing.
India's four Labour Codes — consolidating 29 central labour laws — are in various stages of state-level notification. Verify compliance with applicable provisions around wages, social security (PF, ESIC, gratuity), occupational safety, and industrial relations. Gaps in historical compliance create contingent liabilities that transfer in a share sale. The specific obligations depend on sector, headcount, and states of operation; verify with a labour law specialist where material.
If the company has transactions with associated enterprises and those transactions exceed applicable thresholds under the Income Tax Act, verify that transfer pricing documentation has been maintained and that no adjustments are pending or under scrutiny.
Request a complete list of all pending income tax assessments, GST notices, and TDS defaults from the seller's CA. Cross-check independently via the ITD portal, TRACES, and GST portal. Negotiate specific indemnities for every material identified exposure.
In a share purchase, verify that the seller owns the shares they are selling, free of encumbrances. Cross-check the shareholding against the Register of Members and the most recent ROC annual return. Check for pledged shares on the MCA charge register — any pledge must be released before closing. Also verify the Significant Beneficial Owner (SBO) register under the Companies Act 2013 is maintained and reconciles with the actual ownership structure. Undisclosed beneficial ownership layers can create post-closing governance complications.
Pull the company's filing history from MCA21. Review the MOA/AOA, board resolutions authorising material transactions, all filed annual returns, and the charge register. Look for unsatisfied charges on repaid loans, director disqualification history, and any show-cause notices or strike-off proceedings visible in the MCA history.
Review all material customer, supplier, distribution, and licensing agreements for clauses that allow a counterparty to terminate or renegotiate on a change of ownership. These are particularly common in government contracts, franchise agreements, and technology licences. Where identified, assess materiality and whether consent should be obtained as a condition precedent to closing.
Review employment agreements for key personnel — notice periods, non-compete clauses, garden leave provisions. Verify PF and ESIC compliance through the respective portals. Review any ESOP or bonus obligations the buyer will inherit. Assess key person risk: which employees are essential and what is their likelihood of staying post-acquisition?
Identify all IP — trademarks, patents, domain names, software, trade secrets. For each, verify that it is registered in the company's name — not the promoter's name, not a related entity. Trademarks held personally by the Indian promoter are a common finding and need to be transferred before or at closing, with the tax and stamp duty implications of that transfer assessed in advance.
Do not rely solely on the seller's disclosed list. Run independent searches through district court portals, the NCLT, the DRT where applicable, and consumer dispute redressal commission databases. Assess each proceeding for quantum of potential liability, likelihood of adverse outcome, and timeline to resolution.
List every licence, registration, and approval the business needs to operate. Verify each is current and in the company's name — not the promoter's. Common areas of concern:
If the business occupies owned property: verify title deeds, obtain encumbrance certificates, confirm the property is in the company's name, and review all lease or rental agreements. Check municipal approvals and building plan sanctions. For leased premises, confirm the lease survives a change of ownership and assess renewal risk. Stamp duty on property transfer varies significantly by state — model this into total acquisition cost early.
Review current coverage — property, product liability, professional indemnity, and key-person policies. Confirm policies survive a change of ownership and identify any material uninsured risks.
For businesses with significant customer data — e-commerce, fintech, healthcare, consumer services — assess compliance with India's Digital Personal Data Protection Act, 2023. Verify consent mechanisms are in place and engage a lawyer with data protection experience for any business where personal data is a material asset or operational input.
Run independent litigation searches — do not rely solely on the seller's disclosure. Verify every material licence is in the company's name and transferable. Check the SBO register is complete and reconciles with the actual cap table.
Work through revenue by customer for the last three years. What percentage comes from the top five and top ten customers? Has concentration increased or decreased? Have significant customers been lost, and why? For the largest customers, is the relationship documented in a formal contract — or is it personal to the founder?
Map the top ten suppliers by spend. For each: single-source risk, pricing stability, geographic concentration, and contractual arrangements. For businesses dependent on imported inputs, assess exchange rate and supply chain risk.
This is the most consistently underestimated risk in Indian SME diligence. In many founder-led businesses, critical knowledge, relationships, and decision-making authority sit entirely with the founder. If this is the case, structure the deal accordingly — longer transition period with specific deliverables, retention packages for key employees, and contractual obligations on the founder to effect customer introductions.
"Revenue that is personal to the promoter is not business value — it is relationship value that evaporates on exit. The buyer's job is to quantify that risk before signing, not discover it after closing."
Review the org chart against reality. Who actually makes decisions? What are the notice periods for critical staff, and are they enforceable? Identify the highest-risk employees from a retention perspective: salespeople who own customer relationships, technical specialists with non-replicable skills, and operational managers who run day-to-day processes.
Assess whether the business has documented processes for critical functions — or whether knowledge is entirely in the heads of individuals. Review accounting and ERP systems: are they standard commercially available platforms, or proprietary systems with limited portability? For businesses where customer or operational data is a material asset, also conduct basic cybersecurity diligence — assess whether data is adequately secured, whether there have been incidents, whether access controls are in place, and whether systems carry unpatched vulnerabilities that create post-acquisition exposure.
Map every significant customer relationship to a specific individual. If that individual is the founder, build a specific transition plan into the deal structure before signing. Do not assume customer relationships will survive a change of ownership without active management.
These checks are specific to the Indian regulatory environment and are not covered in generic due diligence frameworks.
Run searches on the Ministry of Corporate Affairs portal (mca.gov.in) for: the charge register (verify all charges are satisfied for repaid loans); director history (check for disqualifications under Section 164 of the Companies Act 2013); filing history (gaps and delays signal compliance culture); and any show-cause notices or strike-off proceedings. Do not rely on the seller to surface these — run them independently.
Obtain a CIBIL credit report for the company and — with the promoter's consent — for the promoter personally. This surfaces defaults, settlements, or adverse credit events that do not appear elsewhere. For businesses with significant borrowings, also review loan account statements to confirm regular repayment and no default classification.
Confirm active GSTIN status. Cross-check e-way bill volumes against reported logistics activity for goods-heavy businesses. Verify HSN/SAC codes are consistent with the nature of the business. For multi-state businesses, verify each GST registration separately.
Verify that the company's EPFO code is active and that employee count registered with EPFO is consistent with the payroll figure in financial statements. Gaps between payroll headcount and EPFO headcount are common in Indian SMEs and may indicate informal employment arrangements that carry their own legal risk.
Some licences are granted to a specific individual (typically the promoter) as a "qualified person" or "person in charge." In these cases, the licence does not automatically continue when shares change hands. This is particularly relevant in pharmaceutical manufacturing (drug licences), certain financial services businesses, and businesses holding specific government approvals. Verify the position with a specialist before assuming continuity.
Personal guarantees given by the promoter on company borrowings do not automatically transfer in a share sale. Confirm as a condition of closing that the bank releases the promoter's guarantee (with the buyer providing replacement security), or that a clear arrangement exists. This is one of the most common sources of post-closing disputes in Indian SME transactions and must be resolved before — not after — signing.
Run MCA, CIBIL, GST portal, and EPFO checks independently — do not rely on seller representations for any of these. Confirm bank NOC and guarantee release as a formal condition precedent to closing, not an informal understanding.
The skill of a well-advised buyer is translating DD findings into appropriate deal terms, not simply walking away from every imperfection.
Financial DD findings that reduce normalised EBITDA flow through to a proportional reduction in the purchase price. Identified liabilities result in either a direct price deduction or the seller's commitment to resolve the liability before closing.
Where DD surfaces a specific identified risk that cannot be quantified with certainty — a pending assessment, a disputed contract — the appropriate protection is a specific indemnity in the SPA: a direct contractual obligation on the seller to reimburse the buyer for any loss arising from that specific matter. Specific indemnities are typically uncapped and more powerful than general warranty coverage.
For residual risks that DD could not fully rule out, buyer protection comes through general representations and warranties backed by escrow or holdback. In some Indian SME transactions, a portion of the purchase consideration is held in escrow post-closing — commonly 12 to 24 months — to provide accessible recourse if a warranty claim arises. A seller confident in the accuracy of their disclosures should be willing to accept reasonable escrow terms. Strong resistance to any post-closing protection mechanism is itself a signal worth noting.
Material DD findings sometimes need to be resolved before closing — not just indemnified against. Common examples: obtaining consent from a key customer where a change-of-control provision has been identified; transferring IP from the promoter's name to the company; obtaining bank NOC for guarantee release; resolving a specific regulatory compliance gap.
Some findings justify exiting the transaction. These typically include: systematic financial misrepresentation that cannot be reconciled across sources; undisclosed material litigation that fundamentally changes the risk profile; licences or contracts essential to the business that cannot be transferred; or fraud or intentional concealment that destroys confidence in the seller's disclosures. The standard for walking away is not that problems exist — every business has problems — but that the problems are so material, or the seller's conduct so concerning, that the risk cannot be adequately priced or protected against.
Before any findings discussion with the seller, consolidate all workstream issues into a single ranked issues log — categorised as price adjustment, specific indemnity, condition precedent, or walk-away. Negotiate the package, not individual issues in isolation.
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