In mergers and acquisitions (“M&A”), many aspects are taken into consideration. Other than price, the buyer may also evaluate the business prospects, human resource, company culture, legal matters, etc before the deal can be closed. Whatever the aspects to be considered, no doubt the financial part still plays a big part in a deal.
Here’s the scenario: You have the capital to venture into a new business. After filtering out the potential targets, you decided to buy Company ABC. You love this company because the business is doing well (according to the owner). The owner showed you the audited financial statements. Everything seems good, revenues and profits are growing; it pays tax on-time (according to the owner); machineries and equipment are there (it’s shown in the balance sheets) to continue business immediately after taking over; no debts, suppliers and customers are mostly long term and no collection or payment issue (the owners said); etc.
Do you take the information as it is? What other financial aspects in the company that you need to pay attention to? Is there any potential liabilities post take-over? To mitigate these, you should perform a financial due diligence on Company ABC.
Read about our post on: What is Financial Due Diligence here.
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