Financial Due Diligence: what is the relevance of the procedure at the present time

Contents:

• The Essence of Financial Due Diligence
• Advantages of the Due Diligence procedure
• Relevance of Due Diligence for business
• How to choose a company to conduct Due Diligence
• Financial Due Diligence Key Points

Due Diligence is a special process that is necessary for a comprehensive assessment by specialists of the investment object. First of all, this process is conducted to avoid potential investment risks. Moreover, such a service includes a comprehensive audit of the financial state of the company, an analysis of its operations, as well as legal assistance in case of sale or purchase of assets.

The Essence of Financial Due Diligence

By the time of the transaction, it is important for the investor to have complete data on the financial position of the acquired asset, its liquidity and potential. The higher its notional value, the higher the importance of having an appropriate expert and his qualifications. When acquiring a business without appropriate knowledge, you can not only get the desired benefits, but also lose property through incorrect registration of various documents or due to non-payment of taxes.

Specialists can be financiers and auditors, as well as lawyers and tax consultants. In most cases, investors who intend to purchase a certain business or real estate object need such services. The value of the latter can be defined as market, liquid or investment value.

Accordingly, Due Diligence is recommended in the following cases:

• Acquisition of an asset or its sale. Concerns shares, stocks or real estate.
• Reorganization of a legal entity. It is referred to merging and acquisition, splitting and transformation.
• Receiving sponsorship.
• Inefficient activity of the organization.
• Changes in the management structure.
• Various corporate conflicts and disputes.  
• Participation of the equity owner in the company’s affairs.

Advantages of the Due Diligence procedure

Currently, the Due Diligence procedure is no longer a test that can be related exclusively to the banking sector. Every year number of organizations in need of the services of relevant experts for a full-fledged business analysis is increasing. In the case of a potential acquisition of an asset, Due Diligence makes it possible to obtain reliable legal and financial information before the transaction, respectively, to avoid possible risks and plan the development of the company most effectively. Other advantages include:

• Obtaining by the owner or investor of trustful and objective information based on expert assessments and methods.
• Availability of up-to-date data during various financial calculations. This concerns, first of all, estimates of capital investments, calculation of attracted investments, appeals to creditors.
• Confirmation of the data available to the company for negotiations regarding the purchase or sale of objects.

Relevance of Due Diligence for business

By applying for the Due Diligence service, the client significantly reduces the risks for a number of circumstances related to:

• Loss of funds.
• Legal costs.
• Acquisition of assets at an inflated cost.
• Invalidity of the transaction.
• Various sanctions against the company.
• Seizure of assets.
• Bringing to administrative, tax or criminal liability.

When conducting an analysis, experts work with the available information. In the future, they make a professional verdict regarding the liquidity of the existing asset. The form of the expert opinion can be:

• Expanded – which is a deep expert analysis of the information with the presence of subsequent conclusions and proposals.
• Brief – this one is related to recommendations and suggestions for further actions.

Also, such analysis in most cases contains information about the HR potential and technological level of production. Experts in three areas are often involved in the work, each of which prepares three independent reports. An appropriate presentation is prepared for the most important information.

How to choose a company to conduct Due Diligence

Companies providing Due Diligence services in the Russian market often use different ways of price assessment. Accordingly, the cost of the service will vary. In any case, Due Diligence is a rather expensive due to the special complexity and high level of responsibility.

In general, organizations that provide such services must meet the following criteria:

• Have a relevant experience with the Due Diligence procedure.
• Have a high rating and a sufficient number of positive reviews about previously performed procedures.
• Have experienced staff from among experts who are able to conduct a comprehensive study.
• Have the resources to provide analysis of the investment subject.
• Follow the principle of efficiency in the analysis. This directly depends on the experience of the expert group and the smoothness of Due Diligence.
• Have mutual understanding within the work team.

Financial Due Diligence Key Points

Most commonly, during the procedure, a specialist does following:

• Assesses the financial state of the company.
• Analyzes the income and expenses of the company.
• Evaluates the work of the accounting department, as well as the senior management.
• Analyzes financial records from the point of view of their reliability.
• Assesses the dynamics of financial indicators.
• Checks the operation of internal control systems in terms of their effectiveness.
• Conducts an inventory check of the assets of the company being purchased.

The result of the completed work will be a report containing all the necessary conclusions. Typically, it will contain general data about the company, information about net assets, an estimate of cash flow, the efficiency of a number of departments, and other points.

It is worth mentioning that the Due Diligence procedure can take from several months to a year, depending on the size of the business being audited.