Financial Due Diligence in a nutshell

This is a guest post from Jadelyn. She is presently working in an accounting firm , particularly financial advisory services. She is known as a Transaction Services (TS) professional. The financial due diligence services are mainly provided to corporate buyers and private equity houses. If you want to buy a business, make sure you seek help from Jadelyn to perform the due diligence. Thanks Jadelyn for the insights!

I have been invited by KC Lau to write an article on my line of service. I am a transaction services professional, which basically involve carrying out financial due diligence during a merger and or acquisition. Many of you are still wondering what exactly that is, don’t you? In a nutshell, if a client is interested in acquiring another company, however, have no idea if there are any black holes underlying the company, the acquiring party could engage us in carrying out a due diligence exercise. By performing a due diligence it could help in identifying the issues before deciding to proceed further.

Due diligence in simple terms merely means to perform an investigation on a particular transaction. Due diligence can be performed in many areas, such as financial, taxation, commercial, human resource, information technology (IT), legal and or environmental. This article focuses on due diligence from a financial point of view.

Many people have been asking how is the economy outlook for transaction professionals considering there appear to be a global slowdown in the economy for merger and acquisition. The answer is, it will be a challenging year ahead for the profession. However, you never know whether it could be a boom year or otherwise. As cash rich companies could be on a lookout for businesses at distressed value. The following paragraphs will briefly bring you through what exactly we would look at in performing a due diligence exercise.

In a financial due diligence we provide support for merger and acquisition. Gain an understanding of the client’s corporate plan, identify risk associated with the seller, consider local and cross border tax issues, identify potential deal breakers and price adjustment and assist in structuring an optimal bid, to assure a successful transaction.

By now many would be wondering how exactly we go about identifying potential issues and risk as mention above. In a nutshell we analyse the selling company’s quality of asset and earnings to get a sense of the normalized quality of earnings and quality of assets.

Quality of earnings reflects the financial performance of a company under normal circumstance. In arriving at normalized earnings we would eliminate potential one off gains or losses. For example, impairment loss on an asset, or permanent diminution in value of investment.

In analysing the quality of assets, we would analyse assets and liabilities to be acquired. For example, are there finished goods in stock that are unlikely to be sold of within the next 3-6 months? Are the liabilities of the seller for purchases that occurred prior to the closing date no purchaser would want liabilities to appear later on and wonder, “Where did they come from?” In most cases, tax due diligence would be performed hand in hand to ensure whether taxes have been filed appropriately by the seller, as this may affect the quality of assets and earnings of the seller company. It’s important to ensure that the seller has complied with all tax requirements.

I hope the this article have enlighten many individuals that have intention or interest in acquiring or taking over companies.