Importance of Financial Due Diligence When Acquiring New Business

Importance of Financial Due Diligence When Acquiring New Business

If you are thinking of buying a business or expanding your existing one or are looking to onboard a new supplier for your business, this is where you stop in your steps to conduct what is called ‘due diligence’. Due diligence is an investigative process which covers a wide range of critical areas including legal, financial and operational matters. Financial due diligence helps determine the exact value of the target company. It goes beyond auditing, which is an opinion on whether the historical financial statements represent a fair view of the company’s operations; it instead delves deeper into the reasons for those statements with their relevancy. It focuses specifically on the key information that has been asserted to the buyer, often largely through the financial statements.

For conducting financial due diligence, the prospective purchaser is required to get access from the seller to conduct due diligence on them. The scope of each financial due diligence project will vary depending upon the nature of the transaction and the size of the company or business operations being acquired.

Financial Due Diligence Process generally takes into consideration the following information of the acquired company such as: ●

Historical financial statements of the company,

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Detailed management accounts and reports,

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General ledgers,

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Trial balances,

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Cash flow assessment

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Business plans/budgets and forecasted financial information.

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Employee strengths/ weaknesses & commitments

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And other key deal considerations

The information required to complete the financial due diligence investigation is subjective and will depend upon the scope of work of the target company.

Who can perform Financial Due Diligence for you?

Financial due diligence can be conducted internally by the acquirer’s own finance team or can be undertaken by independent external accounting companies having the required expertise and experience such as CRIF. CRIF Business Information Report lets you perform in-depth customer due diligence by performing various identity verification protocols and looking at the key issues of the business including financial risks, legal issues, operational risk and supplier and buyer relationships.

Business information reports help you in analysing: ●

Customer Credit Risk Assessment

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Import and Export Risk Assessment

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Buyer and Supplier Risk Assessment

It is a point worth noting that the cost of performing professional financial due diligence from a third party far outweighs the cost of a bad acquisition.

The ideal time to conduct FDD The best time to perform financial due diligence is right after the negotiation stage of acquiring a company or business. In practice, once the Heads of Terms have been drafted setting out the structure of the deal, the financial due diligence may commence.

Financial due diligence can answer several critical questions such as: ●

Is the information provided by vendor true and reliable?

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Are the company earnings (per the historical data) enough to sustain for the future?

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How much is the earning potential of the target company?

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What synergies come along with the acquisition?

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What effects will the acquisition hold on immediate and future taxes?

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Has the company invested enough in capital expenditures?

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What are the liabilities that should be considered?

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Does the company have any future commitments or contingencies?

In summary, financial due diligence provides a 360° review of the company by looking at its past, present and future. It identifies the issues the acquirer and vendor should address to complete a successful transaction. A rightly done due diligence report provides solid support to/against the proposed acquisition and helps identify factors such as the amount of risk involved, the issues that are

expected to come up and the steps to counter them and whether this acquisition will really add value to the acquirer. CRIF is one of the four credit information companies in India providing customer due diligence services, business reports and credit score.