Financial Due Diligence - essential pre-requisite to a successful acquisition

Although this represents an extra cost to add to all the other transaction expenses, we regard it as money well spent since any skeletons that remain undiscovered could end up costing far more further down the line. It really is a case of “Caveat Emptor”.
Imagine therefore that, instead of buying a car or a house, you were buying a multi-million pound business. 

The responsibility would be onerous enough if you were buying it yourself but it is ten times more burdensome when you have other shareholders involved. If you are managing a publicly quoted company with hundreds, if not thousands, of shareholders to answer to, then the acquisition of a business with something hidden in the closet could be disastrous, not only financially but reputation-wise.

This is why due diligence by expert professionals is still so vital before an acquisition progresses beyond the point of no return. A Five Star hotel business would probably involve a full buildings survey while a mine and its associated equipment would probably have to be inspected by specialist mining engineers.

Although this sort of non- financial due diligence is obviously important, it is the financial due diligence that is absolutely critical. This is usually conducted by a top firm of accountants who have specialists experienced in providing due diligence for business acquirers and, if necessary, their funders.

Sometimes, the owners of a business who are looking to sell might commission vendor due diligence to highlight any problems which can then be sorted out prior to the sale process. Apart from anything else, this precludes the possibility of any gremlins being used as a bargaining chip by prospective purchasers.
The scope of financial due diligence commissioned will always depend on the nature of each individual transaction but would typically include:

• an in-depth analysis of underlying historic performance, cash flows, assets and liabilities
• a critique of management forecasts, including the working capital requirements of the business
• a review of the underlying financial systems and controls
• analysis of the taxation position of the business.

The accountants’ final report will include a summary of the key issues arising from the due diligence process along with their views on the associated risk and implications for the deal. This will include integration and other post deal issues like quantifying potential cost-saving synergies where appropriate.