What understands with Financial Due Diligence?
The term “financial due diligence” refers to an investigation of a company’s financial affairs. It is a thorough examination of a company’s past and projected patterns in order to verify their relevance and accuracy.
Primary Focus area of Financial Due Diligence
- Revenue generation is examined, as well as the quality of earnings, cash flows, and margins.
- Revenue continuity factors such as working capital, financial debts and liabilities, taxes, interest, depreciation, and projected financial numbers.
- Identifying possible obligations and liabilities
- Identifying other factors that may impact the business further
Depending on the size and industry of the target firm, the scope of financial due diligence varies from company to company.
Based on the results of due diligence, a buyer should be able to determine whether there are any potential deal breakers, whether the acquisition structure and price are appropriate, and whether appropriate warranties and representations are included in the purchase agreement, based on their risk profile.
What are the objectives of Financial Due Diligence?
- To investigate and disclose any financial risks associated with the company.
- Understands the past financial situation of the company
- Analyzing the target company’s balance sheet
- Analyzing the target company’s profit & loss
When to conduct Financial Due Diligence?
It should be undertaken whenever a purchaser acquires a new business.
The financial due diligence should commence when both the buyer and the seller have agreed to an expression of interest or letter of intent (which lays out the deal structure).
The process of financial due diligence should be given adequate time. It requires two to four weeks depending on the size of the target and the scope of the work of the company.
Who is authorized for doing the financial due diligence?
Financial due diligence can be carried out either internally, by the acquirer’s own accounting and finance department, or externally, by independent due diligence experts.
The benefit of the involvement of External due diligent experts in conducting FDD is that the due diligence is based on an unbiased opinion from a party with no direct involvement in the proposed transaction’s success.
What required?
Financial Due diligence mainly requires information from past and present financial statements, general ledgers, detailed trial balances, income tax returns, and bank statements.
Conclusion
Depending on the nature of the risk, financial due diligence helps the organization become aware of all the risks associated with a transaction so that they may manage them. The Financial Due Diligence procedure is used to give the acquirer a realistic insight into the Target Company’s operations. As a result, this procedure is a vital and indispensable instrument for the acquirer to notice the Target Company’s risks and concerns. As a result, the acquirer performs Due Diligence on the company.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
Posted by
Mansi Seewal (Forensic)
AKGVG & Associates