Financial Advisory Services: Financial Due Diligence

Mergers and acquisitions are a natural part of a business’ life-cycle. However, that doesn’t mean that buying or selling a company is a simple procedure. If you are looking to purchase a business or merge your operations with that of another, there are certain processes that must be followed to protect both you and the seller. Financial due diligence is one such process. Due diligence is both necessary and complex, which is why it makes sense to go partner with a professional financial advisory services team so that you can be confident in your final decision. What is financial due diligence? Financial due diligence is the term often used when discussing a business or asset purchase, merger or acquisition or for an external party to provide financing to a borrower. A potential buyer or lender will go through the process of financial due diligence to ensure that the company they are looking to buy or lend to is financially stable. Financial due diligence ensures that all parties involved in the transaction have access to financial information to enable them to make a fully informed decision. It is used to mitigate risk during the acquisition process. When looking to perform financial due diligence, a financial advisory firm will typically study documents relating to financial performance, cashflow and capital requirements, debtors, creditors, employee salaries and entitlements, assets (both physical and intellectual), lease arrangements, guarantees, bonds, pre-payments and insurance. Many people confuse the process of financial due diligence with that of a financial audit. In reality, they are very different activities that produce vastly different information. While an audit is concerned with verifying the truth of historical financial records, undertaking due diligence has an additional focus on the current state and future of a company or business. Taking into account historical and current information, financial due diligence determines the accuracy of a financial forecast — information that can be used to make an informed decision. The process of financial due diligence The process of financial due diligence varies depending on the size and complexity of the company or business. Typically, it tends to involve investigating and asking questions relating to: ● The company’s ability to make a profitrn● Its short term and long term cash requirements and its ability to maximise its working capital requirementsrn● The condition and valuation of equipment and any future capital requirementsrn● Who value of any intellectual property (including trademarks and software) and an assessment of any risksrn● An analysis of the company or businesses strengths, weaknesses, opportunities and threats ● Its solvency now and in the future. If you are looking to undertake financial due diligence, it is highly recommended that you make use of professional financial advisory services. Such teams — which typically include both accountants and lawyers — will have extensive experience conducting due diligence and will know exactly what to look for so that you can make an informed decision. Business acquisition is not a standardised process. However, financial due diligence tends to operate via the following timeline: 1. Request for documentation review The process commences as a member of the due diligence team sends through a request for all the documentation that is required to make an informed decision. Depending on the industry, it might also be useful to physically inspect facilities, equipment and assets. 2. Documentation is provided The seller will provide all the information that you need. This information is highly sensitive from both a commercial and personal perspective. Often, the seller (or their legal team) will request that you sign a non-disclosure agreement before providing the information. 3. Requests for information After the documentation has been provided the potential buyer has the opportunity to ask further follow-up questions. This is known as an RFI or ‘Request for Information’. 4. Information is provided The seller will provide all of the information that you require in response to the RFI. At this stage of proceedings, the two parties may discuss key concerns, as well as strategies that could be implemented to mitigate potential issues and facilitate the sale. 5. Due diligence reports are prepared and assessed Once they have all the information they need, your due diligence team will prepare a report outlining the operational and financial viability of the company. These reports can be used to make an informed decision as to whether you want to continue with the purchase or lending facility. 6. A decision is made Finally, a decision is made. This can be purchasing the business for the asking price, negotiating a reduced price based on the information your due diligence report uncovered, or choosing not to proceed with the purchase or lending facility. Benefits of conducting financial due diligence There are numerous benefits to undertaking a thorough due diligence process, including: ● The opportunity to withdraw from a sale if significant risks are identified. ● The opportunity to negotiate a lower asking price. ● Providing confidence in financial projections. ● Enabling the purchaser to develop an appropriate acquisition and handover strategy. ● Enabling a lender to consider its risks. Working with a financial advisory service team As mentioned, you should not undertake financial due diligence without the assistance and experience of a professional financial advisory services team. While mergers and acquisitions do provide the opportunity for growth and expansion, there have been many instances in which one business purchasing another has resulted in both completely collapsing. A financial advisory services team has the ability to not only conduct financial due diligence, but can provide holistic, strategic advice about the broader opportunities and ramifications of making an acquisition. Put plainly, no matter how much experience you have in your industry, you need professional financial advice before making such a significant decision. So, speak to a financial advisory services professional today!