One of our Snowball Corporate finance services is Due Diligence. We have worked on a number of financial due diligence exercises for clients. This has been either assessing targets for acquisition, or on the other side, to provide the due diligence information to a third party to vet and review everything before it goes off.
Ultimate Aim of Financial Due Diligence
Ultimately what you are trying to achieve in a financial due diligence exercise is to verify the financial information provided and to assess the underlying performance of the business. This will involve looking back at past performance (minimum 3 years), current trading and the assumptions and robustness of the projections/potential going forward. It links not only to what you are buying but also what you are paying for and the value being placed on the business by the seller.
It can cover a number of areas including:
Profit and Loss
- Review of both annual and management numbers
- Key financial ratio trends
- Quality and accuracy of management information
- The quality of the earnings
- The volatility of the earnings
- Any exceptional items
- Review of expenses
- Licences and subscriptions
- Stock value and aged review
- Currency risks
Balance Sheet
- Review of both annual and management numbers
- Key financial ratio trends
- What assets are owned
- Value of the assets
- Intellectual Property
- Depreciation methods
- Review of aged debtors and creditors
- Liabilities (actual and hidden)
- Is PAYE, VAT and Corporation Tax up-to-date
Projections
- Review of projections and assumptions
- What contracts are in place that can underpin projections
Cashflows
- Understanding of the working capital cycle
- How much cash is being generated
Finance
- What debt and leasing is in place
- Funding terms and agreements
Other
- Any qualifications and/or issues in the accounts
- Review of the notes in the accounts
- Key financial risks
- Companies House filings being up to date and accurate
- Shareholders and directors
- Structure of business
- What financial systems are in place
- Any litigation ongoing
- Staff contracts and Employee handbooks etc.
- Tax due diligence
- Pension schemes
This isn’t an exhaustive list and will vary depending on the business, but this is a good starting point checklist.
What does Financial Due Diligence Reveal
I usually find very early on that I can have a good feel for how successful the due diligence is likely to be. From the initial request for information, it is always telling to see whether the information is then available, whether it is up-to-date, and whether it turns out to be accurate. If there are early delays or a push back on providing information, there is usually a reason, and not normally a good one!
Naturally financial due diligence is only part of the overall due diligence that needs to be undertaken to decide whether to go forward with a deal. However, in my experience, the deal pretty much lives or dies by its financial due diligence. We can also help clients on the other side of a deal, where companies have to provide information to potential buyers, investors or private equity.
Snowball can arrange, review and package the right information, ensuring the third party receives timely, up-to-date and accurate details, with the full knowledge how that information will then be reviewed at the other end by the third party.
If we can help, please do get in contact with us.