Before making a deal, it is necessary to analyze the situation comprehensively. The critical task of financial due diligence is to minimize risks and form an objective picture of the potential attractiveness of the transaction for the client.
Due diligence – the best way to analyze business profitability
Financing rounds usually begin with investor due diligence because he is interested in getting an overview of the company’s legal situation. The result of the due diligence influences the purchase price, the terms of the deal – or whether it even goes through. The investor does not know in advance precisely what documents are available in the startup and, therefore, usually requests a large number of contracts and overviews.
At the conclusion of major transactions, many domestic companies still prefer to be guided by intuition rather than accurate calculations. Thus, they put themselves at risk. Instead, reasonable businessmen prefer to exercise “due diligence” and resort to the due diligence procedure, making the transaction completely transparent.
Financial intelligence is a set of methods for collecting, storing, and analyzing financial information about companies an enterprise interacts with directly or indirectly (competitors, suppliers, buyers). Financial intelligence is aimed at identifying risks and threats, as well as new business opportunities.
Due diligence is a collection of comprehensive information that allows you to get an accurate idea of the chosen investment object and make an informed decision on cooperation. The procedure can be used in many business processes to complete an audit of the company’s activities from organizational, financial, legal, and other aspects. Due diligence is beneficial to both parties to the transaction. The investor can evaluate the prospects of the business he is interested in and ensure the legal purity of the transaction. The seller is to confirm good faith and, as a result, receive new profitable offers. Based on the information received, the organization’s value, the prospects for its development, and profitability are assessed, and the risk of bankruptcy is indicated.
What is the procedure of due diligence?
Financial due diligence in business combinations is an indispensable tool for decision support, purchase price negotiations, and purchase contract formulation. If you structure the due diligence well, you protect yourself against risks, calculate purchase prices more precisely, and simplify integration, creating transaction security.
Company financial due diligence includes the following points to consider:
- analysis of assets and sources of financing, fixed assets, inventories, accounts payable and receivable, the structure of income and expenses;
- analysis of debt history, as well as the identification of hidden liabilities;
- assessment of accounting and document management systems used in the company.
It means a lot of work for the founders, which they have to do alongside the operational business. The due diligence report shows the analysis results, opportunities, and risks as decision support for the client. The normalized asset, financial, and earnings situation is often presented, and, if necessary, a proposed adjustment to corporate planning is made. In the further process of the transaction, the due diligence results can be used to select suitable valuation multiples, optimize the purchase price depending on the financing structure and record additional provisions. Therefore, the founders should choose a data room provider that can comply with data protection requirements.