Financial due diligence is detailed financial assessment of the current financial situation at the analysed company including its ability to generate profits in the near future. In the course of due diligence, various financial aspects of the business are appraised, i.e. assets and liabilities, revenue and costs, receivables and payables, bank debts, financial controls and planning system, integrity of the management information and quality of reporting. Due diligence process highlights unusual and uncharacteristic business transactions, analyses intercompany transfers and their impact on financial performance. Particular attention is given to cash flows and liquidity of the current operations, as well as to various factors impacting the cash-generation capacity of a company at present and in the near perspective. In practice, due diligence procedures are carried out for the period of three years back (historical performance) and up to two years forward (forecast). Further, the analysis touches upon feasibility of the business plans, sales projections and profits – all in the context of the current (factual) performance indicators.
In practice, several types of financial due diligence exist. The first – and by far the most familiar – is buy side due diligenc
e or analysis of the business by a potential buyer. Here, analytical emphasis is put on major real assets of the target, strength and stability of the market position, current liquidity, profit quality and feasibility of the management’s operating plans. Second type, Vendor due diligence
, is a study initiated by the owner(s) of the business as potential seller(s). In this case, the scope of analysis remains the same but the main purpose is sale of the business, not the purchase. Varieties of Vendor due diligence are IPO and Eurobond-related fundraising activities, both comprising the IAS/IFRS
audit work. M&A
is the third type of due diligence mainly concerned with pre-transaction M&A analysis. In addition to a standard scope of assessment M&A due diligence involves supplementary strands of analysis. For example, an appraisal of strategic and operating compatibility of the merging companies is conducted; the client base / product range / cost synergies are verified; the optimal structure and management system of the newly-merged company are considered. As practice often shows, participation of an independent expert in the conduct of due diligence is critically important and, in many cases, unavoidable due to the requirements to balance the interests of all parties and to bolster trust for eventual success of the transaction.
Debtor Due Diligence
involves the analysis of financial reporting and the current financial position of the borrower at the request of a lending bank. Undoubtedly, nothing could replace the credit analysis of the borrowers conducted by banks themselves – and such analysis is performed thoroughly at all stages of credit process including the follow-up monitoring. Complementary to bank’s own efforts, due diligence procedures performed by an independent audit company facilitate risk assessment, increase impartiality of the analysis and reduce stress inherent in certain situations such as monitoring of loan covenants
and credits extensions. A defining feature of Debtor due diligence is an imperative to provide professional comfort and assurance to Credit Committees and Boards; this comfort is essential for maintaining quality of loan portfolio. Better understanding of risks equates to risk reduction – hence participation of an independent qualified auditor in the risk-monitoring process is an essential risk-management tool for the banking sector.
Tax Due Diligence
is a particular form of due diligence chiefly concerned with the tax aspects of the business. Scope of the tax-due-diligence work usually includes the assessment of the current tax burden, main tax liabilities and relationships with the tax authorities. Compliance with tax laws and regulations is evaluated by amount and submission date – as well as risks related to social insurance and payroll taxes. Tax analysis can be conducted either in relation to a specific business situation (e.g. as part of a conventional due diligence) or take a form of more general tax consulting
. In both cases, the most valuable outcome of the tax due diligence is the Client’s full awareness of the extant tax risks and the informed decision-making in the context of tax law.
Data Room is the term used to describe an integrated system of access to information used in specific cases such as IPO and M&A deals. As transactional experience of many companies demonstrates, an important auxiliary effect is often a categorisation of data achieved via the arrangement of access procedures. The term “data room” carries the connotations of physical entrapment that do not necessarily correspond to reality: archiving and storing ALL company information in one physical or virtual place is unsafe and impractical. Yet the massive data-mining exercises – usually required for big corporate transactions – often reveal substantial inefficiencies in document-handling procedures and data-exchange process. The term of “Data Room” thus denotes an integrated system of data access and authorised use of information. Our clients discover, time and again, that data room truly works as a practical device – and the positive effects from its implementation remain in force long after a specific transaction is completed.