Due diligence is an investigation, review and analysis carried out to confirm the information/facts which will support decision whether or not to proceed with/complete a deal.
Financial due diligence, by its name, means due diligence that focuses on the business and its financial performance, financial risks and liabilities.
Any findings from a financial due diligence report may potentially be the deal breaker for a transaction.
Financial Due Diligence v Audit
Some people may ask, the target company’s accounts have been audited every year. So why still need to perform financial due diligence? Can’t they just rely on the audited financial statements?
Yes they can, but to a certain extend only because the financial statement does not tell everything they want to know or they may not even know. In fact, audit and financial due diligence are 2 different activities. Audit, in general, is to determine whether the financial statements are prepared and presented correctly, in accordance with the accounting standards. Financial due diligence is performed to assess the financial position and if needed, dig further to obtain the reasons behind certain areas that requires more details for consideration.
When to conduct Financial Due Diligence
Financial due diligence will normally be performed when the buyer has agreed to enter into a deal (taking over a company, buying a business, investing into shares of a company). The completion of the agreement will be pending on the satisfactory of the buyer on the results of the financial due diligence (this can be one of the conditions in the agreement). That is why financial due diligence is sometimes considered as a deal breaker.
Results of Financial Due Diligence
Sometimes, it is not all doom if the financial due diligence result turns out to be less satisfactory. Subject to both parties’ eagerness to complete the deal, they can still negotiate and revise terms based on the findings of the financial due diligence, such as revising the acquisition amount.
Engage the Professionals
In view of the importance of the financial due diligence, it is highly advised to engage professionals with the relevant experience. Whether it is an M&A, investment decision, etc, the amount of capital can be huge and they are hard-earned money. A buyer/investor would not want to complete a deal only to realise what he got was not as what had been expected.
Read about our post on: What do you need to consider in a merger & acquisition here.
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