Corporate finance - due diligence
Financial due diligence is carried out to assist a prospective purchaser, investor or funder to make an informed judgment as to whether to proceed with a proposed transaction or not.
There are a number of purposes to the exercise:
- Identify potential deal breakers
- Challenge, question and test the information upon which a decision has been made
- Assist in the negotiation process via the disclosure of weaknesses or areas of risk
- Identify post completion issues
- Review net assets
- Highlight areas where additional warranties are required
What areas are typically covered?
- Historical trading results
- Accounting policies
- Marketing strategy, pricing, competition and competitive advantage
- Production and suppliers
- Management and staff
- Projected trading results and cash flow
- Sensitivity analysis
- Net assets
- Key business weaknesses
The above list is not exhaustive, and should be taken as a guide only as to the areas which may be covered in a due diligence investigation.
Fieldwork is generally carried out at the company’s premises. As part of the investigation it may also be necessary to review the company’s auditors files.
During the fieldwork other risk areas may be identified that are not covered in the engagement letter. These would be discussed with the client immediately to determine if they require the scope of the assignment to be extended to include an investigation into these additional risks.
A written report is presented to the investor and will usually be discussed at a suitable meeting. The report will highlight and give opinions on:
- Any issues of such significance as to be potential deal breakers
- Any issues that are not deal breakers but may indicate a need to renegotiate the price or the terms of the proposed investment
- Any issues which will need to be considered post acquisition
The key to carrying out an effective due diligence investigation is designing terms of reference which focus on the key risk areas. In order to achieve this we undertake a comprehensive review of all of the information which the investor has used to arrive at their decision before discussing the scope of the assignment. Based on this review and further discussion with the investor we are able to define a terms of reference which covers the main concerns of the investor in an efficient and effective manner.
Hawsons Corporate Finance adopt a risk-based approach to due diligence investigations so that our work is directed to those areas that are considered to be high risk. The output of our work is a focused report that addresses the issues that are relevant to the investor.
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