Financial Due Diligence Services

Due Diligence for Buyers

In my professional life I have completed financial due diligence on almost 100 companies - not all of which were ultimately purchased. My approach to financial due diligence is the same as the other services I offer - focused, practical and efficient. The first step is a review of the proposed purchase agreement to determine if the transaction is an asset or stock acquisition and what the expectations are after the merger or acquisition.

If the acquisition is purely an asset purchase, the buyer wants to make sure that each asset is valued appropriately. The validity and collectibility of receivables, the value of deposits and other prepaid assets are important facts to determine so that the risk of a balance sheet write-down after acquisition is reduced. Additionally, the completeness and valuation of the stated liabilities must also be reviewed to make sure that all potential liabilities are either recorded or disclosed by the seller.

Revenue streams will be reviewed and analyzed to determine the historical gross profits by client, by product or service line, etc. Historical expenditures will be reviewed to determine that all expenses have been disclosed.

One of the first tasks that I complete in financial due diligence is providing the target with a detailed list of documents, analysis and financial information to be made available for review. I first complete a thorough review of the financial statements - including looking at balance sheet account reconciliations to determine that they are up-to-date and that each item on the balance sheet is supported by evidence as to the validity and value of the item.

In addition to the financial and operational information that is reviewed, the human resources must also be considered. The fact is that 75% of acquisitions fail. And the prime reason for the failure is a clash of cultures between the two organizations. It is very important to understand the organizational dynamics of each company. I was involved in a due diligence on a target for which all of the financial (and legal) arrows pointed to the positive. However, the target company was very informal about their operations and financial reporting. This culture would have been directly opposed to how the buyer operates their business. Therefore, the target company would not likely have succeeded as a subsidiary of the buyer. I included this observation in my analysis to the management team and they ultimately decided to pass on the opportunity to buy the company.

My ability to make this observation comes from my experience. I have been in hundreds of companies throughout my career and I understand the dynamics of what makes an organization successful.

Due Diligence Services for Sellers

Sellers can also benefit from due diligence services. The fact is that well-organized sellers often can obtain a higher price for their businesses. If the due diligence team is able to complete the analysis of historical information more efficiently, they will be able to focus more time on the forecasts, market plans and development of synergies.

Therefore, sellers should consider hiring someone to review their financial statements and operations prior to negotiations with potential buyers. As a buyer, I have completed due diligence on organizations that would have been able to command a much higher price had they delayed and spent the time getting their records in order.

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