As acquisitive businesses look to capitalise on potential opportunities in the M&A world, understanding the nuances of financial due diligence is vital.
After the outline terms of a transaction have been agreed, the typical next step for a buyer is to undertake a process known as financial due diligence.
This serves as a basis for the buyer’s decision-making regarding the viability of the transaction from that point onwards.
The process involves a series of requests, typically in the form of an extensive checklist or questionnaire from buyer to seller that, in essence, facilitates the examination of financial statements, cash flows and the assets and liabilities from which the former derive.
The main aims are to verify the initial assumptions made by the buyer regarding the transaction and potentially uncover hidden risks or discrepancies which may impact the viability of the deal.
Financial due diligence is labour intensive for both the acquirer and the vendor, and through the desire to progress the deal, sometimes known as ‘deal fever’, acquirers may be tempted to overlook potential red flags in pursuit of deal progression – potentially leading to costly oversights.
The outcome of financial due diligence provides an opportunity to clarify the initial assumptions underpinning the deal, or where required, revisit and potentially negotiate the transaction based on the true position of the target company.
Ultimately, financial due diligence is the cornerstone of acquirers’ decision making – providing comfort that acquirers, lenders, and advisers can confidently navigate the complexities of deal-making.
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