Whether you are looking to access new markets or create long-term value, mergers and acquisitions (M&A) can be extremely beneficial for your business.

Without a thorough due diligence exercise, even the most promising deal can quickly unravel or turn out to be very different from what you expected.

Due diligence provides you with informed decision-making through the investigation and evaluation of a business before completing a transaction.

It gives you clarity about the risks involved and, therefore, is crucial to protecting the value of investments.

What is financial due diligence?

Financial due diligence is a detailed review of a company’s financial position. It forms part of the wider due diligence process, alongside tax and legal due diligence, and sometimes commercial and/or IT due diligence.

A financial due diligence investigation will include:

  • ‘Quality of earnings’ analysis to assess underlying profitability
  • Working capital review to determine ongoing funding requirements
  • Net debt assessments to confirm financial obligations
  • Forecast and budget evaluations to determine the sustainability of the business following an investment
  • Assessment of financial systems and reporting
  • A review of the management team and their ability to ensure that the business succeeds

The quality of earnings review, in particular, is necessary to understand how sustainable the business is and what level of profits can realistically be maintained.

This review might, for example, identify whether profits have been inflated by one-off transactions or temporary cost savings, or assess the risk of a loss of key contracts and the impact on profits.

All of this is important information for determining whether the acquisition of a business is likely to achieve the financial returns you have based your offer on.

Why is due diligence essential for M&A?

Before you make any decisions and sign on the dotted line, you should have clarity about the performance of a business and due diligence can support this.

The findings from due diligence will also influence and support negotiations, with protections for risks identified typically being agreed in the purchase documentation.

Financial due diligence will also help to determine the figures and terms within the contractual completion mechanism, which can often be a complex exercise and should be led by an expert professional to ensure that value is maintained.

In certain circumstances, due diligence can lead to renegotiations of a deal, particularly if the company’s actual financial performance is materially below what had been understood when the deal was initially agreed.

How can we support your due diligence investigation?

Whether you are acquiring or investing in a business, we can conduct financial due diligence investigations that give you a clear understanding of the company’s financial position and performance.

We provide detailed financial analysis and reporting, summarised in a helpful and concise manner and help to spot any potential risks at the earliest opportunity.

Our professional team can also support you with valuations and deal structuring and offer ongoing advice through to completion of a transaction, while our colleagues at Milsted Langdon can also conduct tax due diligence to support the acquisition process.

With the right professional support, you can have clarity on your investment and be sure that you are making the right decision.

If you need further advice or support with due diligence, contact our team for support.