Financial Due Diligence
Financial due diligence is a process of checking the financial history of a company, its debtor status and assets, as a means of assessing the financial viability of the business in question. It is usually undertaken by a third party who is tasked with carrying out the independent auditing services, and is typically used in the process of mergers and acquisitions.
The aim of financial due diligence is to ensure that the prospective buyer is aware of all the financial implications of owning the company they are considering acquiring. It may involve checking the company’s balance sheet, cash flow and profit analysis as well as carrying out a survey of the company’s assets and liabilities.
The process can also involve a review of the company’s financial statements and the accounts receivable, which is an analysis of the company’s ability to collect payments for goods and services supplied. Other areas that may be investigated include the company’s financial reporting practices, tax records, any litigation or regulatory issues, and cost of capital.
The due diligence process can be undertaken by an experienced accountant or auditor, and should be done before the negotiations for the acquisition begin. This ensures that the buyer has a thorough knowledge of the financials of the company and is able to identify any potential problem areas that might affect the success of the acquisition. This can be critical to the decision-making process and can provide an invaluable insight into the company’s standing.
The due diligence process can be extremely complex and requires the expertise of a skilled professional to ensure that it is conducted in a correct and efficient manner. The process also requires complete and open communication between the buyer and seller, as the seller is expected to provide full details of the financials of the company.
In addition, the financial due diligence process can also provide an opportunity to evaluate the potential of the company in terms of its growth and development, and can help the prospective buyer come to a well informed decision about the value of the company and whether or not to proceed with the acquisition. It can also give the prospective buyer an insight into what the future cost and revenue associated with the acquisition may be.
