What is Corporate due diligence

If you read the financial section of the newspapers, you must have noticed that many companies, planning to start a new venture or to inject more funds into their current business, offer shares for sale. In simple terms, this means that the company wants to give away a part of the ownership of their company to individuals or business houses through selling shares of the same and earning capital in the process. Obviously, only reputable companies that have a strong track record can expect this process to be successful. On a typical basis, shares of renowned companies are oversubscribed several times over during the sale period. No doubt, big companies that wish to purchases those shares undertake a corporate due diligence to find out the health and the present value of the company, especially if the same is going public for the first time.

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In depth details

A company needs funds to run its business. On occasions they might not have enough cash in their books of accounts or do not have enough liquidity to purchase raw materials or new machines to expand their business. While they have the option of taking loans from banks or other financial institutions, they have to pay an interest on the sum received. Selling a part of the value of their company through an IPO (initial public offering) provides them with a means of raising equity capital without worrying about paying interest to financial institutions and banks by taking a loan from them. It also allows individuals an excellent opportunity to purchase shares of that company, knowing fully well that they will receive a handsome return on investment in the way of long term capital gains if they hold the shares for several years.


What kind of company would be interested in this venture?

Any company facing a financial crunch will go for this venture. Funds are essential for growing and maintaining a business. If you believe that all leading companies are running their business from their own money, you are mistaken. They depend on the funds raised from their investors for the purpose. On many occasions, the owners of leading companies attempt to buy a different company in a different part of the world to get a foothold in that country. This requires a huge sum of money. Instead of delving into their cash deposits, the owners prefer raising equity capital through shares. This is a win win situation for both for the company and the individuals business houses. The company does not have to dilute its funds and the purchasers get the opportunity to become a stakeholder of that company.