1. What is financial due diligence for a merger and acquisition transaction?
Due diligence is a process of verification of a potential deal or investment opportunity to confirm all relevant facts and financial information. Financial due diligence involves a detailed analysis of a business, assessing the key issues facing the business and the drivers behind maintainable profits and cash flows and potential deal breakers of the transaction. When done properly, a financial due diligence review provides valuable information to support the proposed acquisition. This process helps to identify skeletons in the closet before acquisition of the business.
2. Why should I carry out a vendor due diligence before I decide to sell my business to potential buyers?
By carrying out a vendor due diligence you can control the flow of information to potential buyers. With vendor due diligence, you can do away with a lot of this uncertainty of a traditional due diligence, by handling the initial part of the process itself. This helps to get an early view of potential weaknesses and risks, and by taking steps to address them upfront, you are in a better position to control the transaction narrative. Vendor due diligence can also help you to avoid buyers trying to push price down.
3. How is a financial due diligence conducted?
Financial due diligence can be performed in a variety of different methods. The most common methods are to perform an analysis of the financial statements, interviews with key employees, market analysis, working capital assessment, quality of net assets, adequacy of provisions, capital expenditure requirements, etc. There is always a need to have trade-off between quality, costs, and the level of desired information. It is important that financial due diligence is conducted by independent advisors or people that can give an independent opinion. 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. After assessing these variables, you should be able to evaluate and know about any factors that might act as deal breakers or whether the price of the acquired company is appropriate.
4. If I am acquiring a business, should I carry out an audit of financial statements of the proposed target?
An audit is basically expressing an opinion on the financial statements prepared by the company. However, a financial due diligence goes a step beyond the stand of an audit. It seeks to assess reasons of the historical trends and basis that what forecasts can be made of the future performance of the company. This helps to identify the quality of earnings, the sustainability of such earnings in future and the impact of that on the transaction price. A financial due diligence thus provides more insight into the business and thus determine a fair price. It also helps to ensure that all safeguards are included in the sale and purchase agreement.
5. Should I avail professional assistance for a financial due diligence?
It would be preferable to use the services of a professional accounting firm possessing expertise in this field. External professionals bring in an independent and unbiased opinion on the transaction as they have no stake in it. Also, given the complexities of business environments the experts fully understand the intricacies and dynamics of M&A environment. Internal staff can be best employed to plan and execute the transactions after closure of the deal.
6. How long does it take to complete a financial due diligence?
The process should begin as soon as an expression of interest has been placed before the seller or a letter of intent detailing out the terms of the transaction has been agreed upon by both the purchaser and the seller. The process should go on simultaneously along with the negotiations. The length of time required to conduct a financial due diligence would depend on the scope of work envisaged and the quality of data prepared by the target management. Since the process does involve a detailed review of at least 2-3 years past financial performance to assess the historical trend, quality of earnings and net assets, a typical financial due diligence process would require about 6-8 weeks to complete the task.
7. Can PKF UAE undertake a financial due diligence?
Indeed, PKF UAE has a dedicated due diligence team which can work closely with you and highlighting any areas of concern that could be critical to the proposed transaction and assisting you with safeguarding your interest.
8. Is conducting a financial due diligence exercise expensive?
Consider the exercise as in investment in your proposed acquisition of a business. It is better to walk away from a deal which is based on false information and statements rather than try saving some money on a due diligence exercise. Walking away from a deal can save you major headaches not to mention financial loss post the deal when things do not appear right.