There are many types of due diligence in M&A and they all need to be performed as part of a thorough process. Missing out any aspect of due diligence could result in loss of time, money and even the deal itself.

Financial due diligence, also known as accounting due diligence, is probably the most easily understood part of M&A. After all, it’s obvious that an organization looking to acquire or merge with another business entity needs a thorough understanding of that target company’s financial state.

Here, we’re going to discuss the basics of financial due diligence, from the buy and sell side perspective, how long it takes, and exactly what information needs to be scrutinized. We even provide a checklist so you can proceed with confidence.

What is financial due diligence? 

Financial due diligence is a crucial assessment of the financial health of a business. During the financial due diligence process, the company’s historical and current financial performance is put under the microscope in order to establish future forecasts and identify any potential risks.

Financial due diligence aims to determine whether a company’s financial information is true and accurate. This helps the buy-side in M&A transactions to get a better understanding of the company’s core performance metrics.

What is included in financial due diligence?

Financial information to be reviewed includes:

• Audited financial statements

• Balance sheets

• Assets and liabilities

• Cash flows

• Capital expenditures

• Projections 


The aim of this process is to determine whether they are true and accurate. This helps the buy-side to get a better understanding of the company’s core performance metrics.

 

Financial due diligence sell-side

In mergers and acquisitions, we generally think of the buyer performing due diligence. However, it's important for the company being acquired to do their due diligence too. Why? Because 46% of deals fail due to issues surfaced during the due diligence process. So, if the sell-side can perform due diligence on their own company first, issues can be identified and gaps filled prior to the buyer getting involved.

This will make for a more seamless transaction and often a higher value outcome for the seller.

Financial due diligence buy-side

For the buyer, financial due diligence is the first step on the road to peace of mind during an M&A deal. A thorough understanding of the target's financial health and prognosis can mean the difference between a good investment and a very bad deal indeed.

The most common way to proceed is to analyze financial statements, order forecasts, market and industry data, and even interviews with key employees. Because of the sensitive nature of this information, the buyer and seller will need to share documents in a secure data room.

How long does the financial due diligence process take?

In general, expect to spend about 1-2 months in due diligence. This is usually enough time for the buyer to complete a thorough evaluation of the business, including the financial aspects.

However, if the seller goes into the deal unprepared, the process can be extremely time-consuming and drag on. This is why always-on readiness is essential to a successful deal.

Financial due diligence checklist

Our financial due diligence checklist covers everything you need to get ready or review (depending on whether you're sell or buy-side) during an M&A deal.

Below is a basic outline of the financial due diligence checklist:

1. Income statements (past five years) showing income and expenditure, profit and loss
2. Balance sheets (past five years) showing company assets and liabilities
3. Cash flow statements (past five years) showing all cash inflows and cash outflows
4. Management discussions around financials, including meeting minutes and emails
5. Operating margin, reflecting the percentage of profit the company produces from its operations before subtracting taxes and interest charges
6. Gross margin (amount of money left after subtracting all direct costs of producing or purchasing company goods or services)
7. Profit margin, i.e. net income divided by net sales or revenue
8. Interest coverage (earnings before interest and taxes divided by interest expense)
9. Debt to equity ratio, showing how much debt there is compared to assets
10. Asset turnover, showing how many sales were generated from every dollar of company assets
11. Return on assets, showing level of efficiency in earning profit from company resources
12. Return on equity, i.e. net income divided by shareholder equity
13. Tax due diligence, showing direct and indirect taxes the company is liable to pay 

To get more detail on all the documentation you’re going to need, download the free checklist now.

The best advice we can give you for a seamless due diligence process if you're the seller is to prepare well in advance of your business exit. There's a lot of information to get ready and the last thing you want is to waste bidders' time. However, if you are selling a business in a hurry, Ansarada Deals is your best solution.

Ansarada Deals brings together a purpose-built set of solutions into one fully integrated platform that delivers value across the complete deal lifecycle. Centralize all your deal activity with Deal Workflow™, project management tools, advanced data rooms, AI deal insights, and post-merger integration frameworks.
Now you can control every aspect of your transaction from start to finish.