Due diligence is a comprehensive analysis performed to determine the financial health of a company prior to a purchase/sale transaction. This service is mainly aimed at buyers. However, sometimes it is performed for the seller (vendor due diligence).
Due diligence provides information on the true financial situation of the company subject to the transaction. This is because official financial statements can be riddled with the results of one-time events, accounting errors or, worse, deliberate efforts to colour the entity's financial situation. However, a proper due diligence report also serves other functions. It points out, among other things, the potential weaknesses of the company, as well as the accompanying risks and threats – including the ones not yet materialized and therefore not visible at first glance.
The results of due diligence are invaluable when negotiating the terms of the transaction, including the price and payment scheme. Particularly important is the so-called "red flag report", which summarizes the key risks and irregularities associated with the investigated company. The client receives it while the due diligence is still in progress, so he can adjust his negotiating strategy depending on the information obtained.
In some cases potential buyer abandons the transaction, because the identified risks are – in his opinion – too big.
Thus, a properly conducted due diligence review serves as a policy against a bad investment.
Scope of the financial due diligence is determined on a case-by-case basis. It depends on the industry, the company's history and size, related-party setup, as well as the buyer's preferences.
typically, the analysis is carried out in the areas of:
- sales and customers – the results provide information on the revenue structure (sales channels, product segments, etc.), recent trends in pricing and product mix, share of one-offitems, risk of churn of significant customers, etc.;
- operating cost lines - the analysis sheds light on the cost structure and the background for its fluctuations, as well as on the cost recognition policy adopted by the entity and its impact on the financial results;
- EBITDA - the results of the analysis provide information on the company's actual operating margins, taking into account items which are non-business, non-recurring or unrecognised;
- net debt – this analysis provides a picture of the actual debt balance in the company, as well as risks related to collateral provided, or risks of termination of financing facilities;
- net working capital – the results provide information on the so-called working capital gap, i.e. the difference between the required and actual level of NWC. Closure of this gap after the transaction will constitute an incremental investment of the buyer, hence it is advisable to reflect it in the price paid to the seller.
We carry out due diligence projects in cooperation with specialists in other fields retained by the client (i.e.: tax, legal or technical advisors). Alternatively, upon client’s request, we are able to propose a comprehensive solution in cooperation with specialized advisors cooperating with us on a permanent basis.
In both scenarios, we ensure top-quality communication between the teams, which significantly affects the overall quality of the study.