When we are hired by Investors or Acquirers for Financial Due Diligence (FDD), our goal is to thoroughly assess the financial health, risks, and performance of a target company, typically for mergers, acquisitions, or investments.

For acquirers or investors into a company, this service ensures that you have a clear understanding of the target company’s financial position and helps uncover any hidden liabilities or risks. For the companies themselves, this can mean uncovering key challenges and finding solutions before important investment milestones, M&A checkpoints or restructuring events.

Scope Of Work For Financial Due Diligence

We will ensure that all accounting allocations are appropriately made and documented, and here are some of the common tasks we are engaged for:

Financial Data Review:

• Historical Financial Analysis: Reviewing the company’s historical financial statements (e.g., income statements, balance sheets, and cash flow statements) for a specified period, usually 3 to 5 years.
• Revenue & Profitability Analysis: Analyzing revenue trends, gross margins, operating margins, and profitability to assess the company’s ability to generate consistent income.
• Cash Flow Assessment: Reviewing cash flow statements to assess liquidity, working capital, and the company’s ability to generate cash and cover liabilities.
• Key Financial Metrics Analysis: Assessing key financial ratios (e.g., debt-to-equity, return on assets, current ratio) to evaluate financial stability, solvency, and overall financial health.

Risk Assessment:

• Identification of Financial Risks: Identifying potential risks, such as debt, unfunded liabilities, pending litigation, or off-balance-sheet liabilities, that may impact the deal.
• Tax Due Diligence: Reviewing the company’s tax compliance, including tax filings, liabilities, and potential exposure to tax audits or disputes with regulatory authorities.
• Assessment of Contingent Liabilities: Identifying any contingent liabilities (e.g., unresolved lawsuits, warranty claims, or environmental issues) that may not be reflected in the financial statements.

Revenue & Expense Verification:

• Revenue Quality Assessment: Verifying the quality and sustainability of revenue streams, including a review of key customers, contracts, and pricing strategies.
• Expense Analysis: Examining major operating expenses and identifying potential cost-saving opportunities or areas of concern (e.g., unusually high marketing, administrative, or R&D expenses).
• Working Capital Review: Analyzing the company’s working capital needs and ensuring it has adequate liquidity to meet short-term obligations.

Asset & Liability Review:

• Asset Verification: Verifying the existence, ownership, and valuation of key assets, including fixed assets, inventory, intellectual property, and intangible assets.
• Debt & Liability Review: Reviewing the target company’s debt structure, including outstanding loans, leases, and any liabilities not reflected on the balance sheet.
• Accounts Receivable & Payable Analysis: Verifying the aging and collectability of accounts receivable and assessing the accuracy of accounts payable.

Forecast Review & Validation:

• Forecast Assessment: Reviewing the company’s financial forecasts and validating the assumptions behind revenue growth, profitability, and cash flow projections.
• Sensitivity Analysis: Conducting sensitivity analysis to understand how changes in key assumptions (e.g., market conditions, operating costs) could impact future performance.

Post-Transaction Considerations:

• Post-Transaction Adjustments: Identifying potential adjustments (e.g., working capital adjustments, net debt adjustments) required to finalize the transaction or investment.
• Synergy Assessment: Assisting with the identification of potential synergies or integration issues that could impact the transaction value.

Key Responsibilities During Financial Due Diligence

Financial Review & Analysis:

• Historical Financial Review: Analyzing historical financial statements to assess the financial performance and identify any discrepancies or irregularities.
• Revenue & Cost Validation: Verifying the accuracy of revenue streams and operating expenses, ensuring there are no overstatements or understatements.
• Risk Identification: Identifying financial, operational, and tax-related risks that may affect the transaction, including potential legal liabilities or contingent obligations.

Documentation & Reporting:

• Due Diligence Report: Preparing a comprehensive due diligence report that summarizes the findings, highlights key risks and opportunities, and provides actionable insights for decision-making.
• Financial Adjustments & Recommendations: Providing recommendations for financial adjustments or changes to deal terms based on due diligence findings, such as price adjustments, earn-outs, or other contingencies.

Communication & Coordination:

• Stakeholder Coordination: Collaborating with acquirer or investor’s legal, tax, and operational teams to ensure that the due diligence findings are shared and integrated into the broader transaction strategy.
• Ongoing Updates: Providing regular updates throughout the due diligence process, flagging any significant risks or concerns as they arise.