Financial due diligence basically means deeply analyzing the overall financial health of the target company before making a merger, acquisition, or investment decision. It gives you insight into the company’s financial performance and its ability to generate future profits.
Financial Due Diligence
Detailed Analysis Support
With this knowledge, you will be able to make better decisions regarding your next steps. You will know how much money you need to invest in order to buy the company. You will also have a clearer idea of what kind of return you should expect from the investment. In addition, financial due diligence helps in better negotiation and reduces acquisition costs.
”The individual investor
Ben Graham
should act consistently
as an investor and
not as a speculator.
Method Overview
Financial due diligence basically means deeply analyzing the overall financial health of the target company before making a merger, acquisition, or investment decision. The scope of financial due diligence differs from one company to another depending on the size and the industry of the target company. Generally, the scope of financial due diligence would involve: Historical Quality of Earnings; Quality of Net Assets; Capital Expenditure Requirements; Financial Debt and Liabilities; Forecasted Financial Results.
Preparation Stage
Before the FDD process is initiated, one must know whether the company is worth investing in. Determine whether the company satisfies the preset criteria including the following: knowing whether the company meets the growth parameters, does it fit within target industry, understand whether there is enough market demand for the product or service provided by the company.
Research Stage
The main objective of this stage is to gather all the relevant information regarding the company: communicating with the decision makers of the target company, reviewing essential documents l(annual reports, press releases), review additional internal documents (minutes of the board meeting, internal balance sheets), obtaining the audited financial statements of the company.
Verification Stage
Verify the information that has been gathered during the earlier stages. It will require to compare the results obtained from the research with the real data available on the company. In this stage it is important to define the scope of the complete due diligence process – identify the needed details and analyze past financial data.
Analysis Stage
When all the crucial information and data have been determined, the next step is to analyze them thoroughly. A broader analysis of the data should be carried out during this stage. This includes analyzing the historical trends of the revenue and expenses of the company and compare the company’s revenue with the expense and revenue of similar companies. In this stage, the cash flow statement and the working capital will be analyzed. Further, the balance sheet should be analyzed to know whether there are any signs of mismanagement or risks.