Due Diligence – Part 4 – Show me the money!

due diligenceAlthough there are actually 3 components to Acquisition Due Diligence, Financial Due Diligence is the first thing most sellers think of when they are considering a business sale.

This aspect of due diligence is all about verifying the financial position of the business and looking for any potential issues.

If the basis of the transaction is a sale of shares, rather than a sale of trade and assets, this aspect of due diligence is particularly rigorous. Amongst the considerations will be:

  • whether they believe asset values are truly in line with what has been booked. For example, are the realisable values of tangible assets in line with the P&L valuations?
  • have taxes been properly calculated and paid? Are there any outstanding, or potentially outstanding, liabilities or opportunities?
  • are key ratios in line with industry/the acquirer’s expectations, and if not why not?
  • is there any evidence of irregularities? Does anything seem unusual?
  • does the company produce regular, useful management information?
  • are the future financial projections realistic? are they based on reasonable and documented assumptions?

Bear in mind that the acquirer will be looking for any evidence of risk in the deal. By the time this stage of the proposed transaction is reached they will have amassed a great deal of information, financial and otherwise, from the Information Memorandum provided and from meeting the sellers and their advisers. Now they will be validating that information and looking out for potential undisclosed liabilities or any others matters that might increase the risk of the investment.  

It’s never worth hiding vital information because it will, invariably, come to light in due diligence. This will result in your buyer questioning other information you’ve provided. Be honest with your advisers – you’re paying them for their advice and expertise so make good use of it.  

To find out more about what’s involved in selling a business, join us at an Evolution CBS Masterclass.

 

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