Tax & Financial Due Diligence

Tax & Financial Due Diligence

Any organisation considering a deal needs to check all the assumptions it is making about that deal. Financial due diligence provides peace of mind to both corporate and financial buyers, by analysing and validating all the financial, commercial, operational and strategic assumptions being made. It uses past trading experience to form a view of the future and confirms that there are no ‘black holes’.

Tax & Financial Due Diligence

Methods of financial due diligence

Financial due diligence can be performed via a variety of different methods. The most common methods are to perform an analysis of the financial statements, interviews with key employees, order forecasts, market and industry data or analyses for benchmarking among other ways. It is important that financial due diligence is conducted by independent advisors or people that can give an independent opinion. This is crucial in order to have a financial due diligence report that gives a fair, open and objective opinion. A financial due diligence review can be conducted either internally, by the acquirers’ own accounting and finance department, or by external independent due diligence experts. The benefit of using external advisers is that the review is based on an independent viewpoint from a party who has no direct interest in the outcome of the proposed transaction.

The objectives of financial due diligence

The due diligence process is much more than a standard checklist of procedures in order to provide approval for a proposed acquisition. When done properly, a financial due diligence review provides valuable information to support the proposed acquisition. There have been several examples where performing expert financial due diligence has saved the cost of a bad acquisition. Financial due diligence generally has the following objectives:

  • Get a good understanding of the historic financial situation of the company and the correctness of the reported numbers
  • Check that there are no hidden financial risks
  • Fully understand the target firm’s balance sheet, profit and loss
  • Forecast the target’s future financial situation
  • Determine if the expected synergies can be realized
  • Get an opinion on the purchase price. The DD can also serve as a basis for further price negotiations (often seen in practice)
  • Get an idea of which guarantees should be requested in the SPA by the buyer
  • Use the financial DD report of an external firm to achieve bank financing
  • Use the financial DDreport to fine-tune the business plan and to prepare the post-acquisition integration plan

Due Diligence Report

The report for a financial due diligence project can differ enormously. Here are some of the contents of a standard financial due diligence report:

  • Analysis of the financial situation
  • Executive summary of key findings
  • Overview and workings of financial business drivers including possible risks
  • Purchase price adjustments to the result (EBITDA adjustments)
  • Analysis of the sales margins in similar industries
  • Check of financial forecasts and give an opinion on the achievability of these financials
  • Audited financial statements for the target company for the last fiscal year(s) with the auditor’s opinion
  • Comparison of last year’s forecasted budgets compared to the actual performance
  • Detail of capital expenditures for the last calendar year(s) and a check on forecasted CAPEX
  • Cash flow-analyze (CAPEX, OPEX and further required capital)
  • Assessment of future management forecasts