Financial due diligence is a process of verifying the financial information and performance of a company before entering into a transaction with it. Financial due diligence involves examining the company’s financial statements, forecasts, historical trends, and key drivers of revenue and profitability. It also aims to identify any issues, discrepancies, or red flags that might affect the deal or the valuation of the company.
Points investor looks for in a FDD report
Financial statements
The investor analyzes these statements to assess the company’s profitability, liquidity, solvency, and growth potential.
Financial ratios
The investor compares different ratios with industry benchmarks and historical trends to evaluate the company’s financial strengths and weaknesses.
Tax records
The investor reviews these records to verify the company’s tax status, identify any tax risks or benefits, and estimate the tax implications of the transaction.
Indebtedness
The investor examines debts to determine the company’s borrowing capacity, debt servicing ability, and creditworthiness. The investor also checks the terms and conditions of the debts, such as interest rates, maturity dates, covenants, and collateral.
Receivables and payables
The investor analyses accounts to assess the company’s cash conversion cycle, working capital management, and credit risk exposure. The investor also verifies the quality and collectability of the receivables and the timeliness and accuracy of the payables.
Ownership structure and shareholding
The investor reviews this information to understand the company’s organizational structure, decision-making process, and potential conflicts of interest.
Notes to Accounts
The Investor verifies the notes of accounts of financial Statements and reviews any adverse Remarks by the Auditor
Litigation information
Investors keenly look out for information on existing litigation and their current status.
Contingent Liabilities
Investors give emphasis on Contingent liabilities that may be shown in Company Financials to assess their impact on going concern of the company
Tips for Successful Financial due diligence
Provide realistic projections
Investors want to see your financial forecast for the next three to five years. Your projections should be based on solid data and reasonable assumptions, not wishful thinking
Address any risks or issues
Investors will look for any red flags or gaps in your financial information. Be honest and transparent about any challenges or problems you face, such as legal disputes, regulatory compliance, debt obligations, etc. Explain how you plan to mitigate or resolve these issues.
Tell a compelling story
Financial due diligence is not just about numbers, but also about the story behind them. You should be able to explain why your business is unique, valuable, and attractive to investors
