Financial due diligence is the analysis of the financial performance of your organisation. It is quite similar to an audit. Financial due diligence is conducted by an independent organisation that gains a better comprehension of the financial condition of the organisation and its prospects. Financial due diligence uncovers the issues that may exist with your company but are not apparent at first glance of the financial information.
Scope of Financial Due Diligence
The scope of the financial due diligence depends on and differs from industry to industry while also being influenced by size of the company and the business scale. The focus of financial due diligence exists on the following points:
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- Assessing the aspects that affect the business.
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- Identifying the possible commitments and liabilities.
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- Revenue sustainability considers the factors of projected financial numbers, liabilities, financial debts, working capital, depreciation, interest, and taxes.
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- Assessing the quality of cash flows, margins, earnings and analysis of revenue generation.
Types of Financial Due Diligence
There are two types of financial due diligence:
1. Buy-side due diligence
The buy-side of due diligence is performed either by the buyer or acquirer who aims to get the targeted company. The buyer can be a venture capitalist, investment bank, strategic investor, private equity firm, insurance company, pension fund, etc. The focus of buy-side financial due diligence is collecting information about the expenses, revenues, cash flow, debtors and creditors, balance sheet, etc., and anything related to the company’s financial aspect.
Whenever an acquirer needs to understand the financial health of a targeted company, they would have to run the buy-side due diligence. The best result of any company’s financial condition is that they are stable and healthy, with a good forecast for the future.
2. Sell-side due diligence
Unlike buy-side due diligence, sell-side diligence is performed by the seller selling their business. The sell-side process focuses on the interest areas for prospective buyers or acquirers to ascertain that there are no hurdles in the process.
The sell-side due diligence works as an internal audit for the seller. The diligence uncovers any issue that may not have been noticeable at first.
Why is Financial Due Diligence Necessary?
Financial due diligence is significant and is required for the following reasons:
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- With the help of financial due diligence, you assess the organisation’s potential prospects. It can act as a deal breaker or maker for the involved entities.
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- From the due diligence, you can get an uninfluenced opinion from a third party, which boosts the trust among the parties.
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- There is an increase in flexibility while utilising deliverables from financial due diligence.
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- When both the involved parties are aware of the financial positions of each other, then they can make an informed negotiation or decision.
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- Also, some challenges can come up later during the transaction; financial due diligence helps with being aware of the issues beforehand.
Conclusion
Financial due diligence is helpful and involves many stages in its process. On such an occasion, when you need to conduct diligence, then you can take assistance from some of the top organisations and firms in India. They provide various services that boost your confidence in the deals and the outcome of the analysis
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