Financial Due Diligence – What it is and how we can help

What is Due Diligence?

Due diligence in a corporate sense is simply a check of a company’s value and commercial viability. Due Diligence is a crucial undertaking that encompasses a range of investigations into a target business by specialist advisers.

When it comes to acquisitions, buyers l want to conduct a due diligence process to better understand the business they’re looking to acquire by reviewing management information. This can help them decide if the purchase is viable before going ahead with it. 

Our experienced corporate finance advisers at PEM can help guide you through any due diligence process you’re looking to undertake. Get in touch here: 

What types of Due Diligence are there?

To effectively assess the value of a company, there are a number of Due Diligence processes that will be undertaken by various parties: 

What is Financial Due Diligence (FDD)?

Financial Due Diligence (FDD) is an independent review of a company’s financial information. At PEM , we specialise in creating company valuations and detailed FDD reports.  

When conducting an FDD report, we will consult with your advisers to collect important financial information about your company. From here, we will create a clear and readily understandable financial report for you. We can also review your business’ background, commercial data, market research and management information to help inform the report, rather than just relying on figures. 

This level of Financial Due Diligence is crucial when making any kind of financial corporate decision. That could be if you are looking to acquire new products, technology, expertise or services to expand your company. 

Our advisers can produce expertly crafted due diligence reports to help you manage your corporate finances and improve your business’ commercial value. Get in touch here or call us on 01223 728222. 

Tax Due Diligence (TDD)

TDD varies in scope but will involve an assessment of a company’s tax compliance and potential liabilities. At PEM, sister company to PEM CF, our dedicated business tax  advisers will work alongside the Corporate Finance team to understand the target’s tax position and their compliance with UK regulations. 

Commercial Due Diligence (CDD)

CDD is an assessment of the business operations, and the market conditions it operates in. It enables an assessment of the practical implications of any business combination. This can be undertaken by the acquiring business or specialist advisers and will be supported by the FDD process.

What is the difference between Commercial Due Diligence vs Financial Due Diligence? Well, FDD focuses solely on the internal financial health of a company. On the other hand, CDD focuses more on the viability of a company’s business model externally in relation to the market its operating in. 

Both FDD and CDD are crucial processes in ensuring a business’ success in any given industry. 

Legal Due Diligence (LDD)

Legal Due Diligence (LDD) is a review of all legal aspects of a business, from employment contracts, title of the target’s assets including ownership of intellectual property to potential litigation. This will be carried out by experienced solicitors who can provide professional guidance on the implications that a change in ownership may have on existing contracts or any potential liabilities.

LDD is linked to and complementary with financial due diligence. By assessing legal obligations (contracts, liabilities, etc.) a company can keep on top of any issues that will affect company value. An FDD process can then reveal the financial impact of those legal findings in company’s financial statement. 

Why would you undertake FDD?

FDD can be undertaken by a wide range of parties and for a number of different reasons:

• be checking a business’ financial health when looking to acquire it. 

• be preparing to sell a business 

• wish to raise funds from an institution. 

Whatever the reason, conducting a financial due diligence report with an experienced business’ adviser is a crucial step in ensuring your business decisions are financially sound. 

How we conduct FDD process and produce reports

The FDD process can vary in length and complexity as each transaction is unique. However, if we support you through the process, your journey with us will involve 5 key milestones: 

1. Consultation –At this stage, we will hold initial meetings with you to introduce ourselves and find out more about you and your transaction. It’s key to determine your rationale, value drivers, any concerns you have regarding the transaction and any areas you feel don’t require detailed analysis.  All of this will help to determine the scope of the engagement and inform our next steps. 
2. Scope & engagement –After the initial meeting, we will work with you to agree your FDD objectives going forward. Financial Due Diligence timeframes depend on the quality of the information provided. But we seek to understand the transaction at the consultation stage so we can jointly agree a timeframe that fits.  Once agreed, we will formalise the scope and commence with the next stage.  
3. Information gathering –At this stage the Corporate Finance team will engage with the relevant parties and arrange “kick-off” meetings and a data room set up. These meetings are designed to help all parties understand the target business in greater detail and tailor the information requests. Here we usually request financial and management data on a monthly basis that will cover the last three full financial years, year-to-date figures and projections for the next two financial years.  But depending on the size and sophistication of the target company, forecasts might not be available. Or if they are, they may not be very accurate. 
4. Analysis & updates –Once all the initial data has been received, we can begin the analysis.  We will create a databook  using the data provided and trend analysis, including KPIs, seasonality assessment, market segmentation, product revenue and costs analysis. The aim of completing multiple forms of analysis is to provide visibility on the data to identify any abnormalities that will impact value.  

   The team will then discuss any queries with the target and ensure that their commercial explanations support the dataset. During this stage, our accountants will send you regular updates to give you peace of mind and help manage the transaction.  

5. Reporting –We start the final step of generating our reports once all queries raised by the analysis have been answered to our clients’ satisfaction and a revised value have been determined for the transaction.  Our reports are robust and comprehensive and will summarise our findings from the FDD process and present them to you in commercial terms. All key findings will be accurate, reflecting the information discussed with the targets’ advisers, and will provide guidance on any material issues identified. If you wish to talk through your report, one of our team will be on hand to answer any questions and to go through our findings with you. We’re here to help!  

Financial Due Diligence is a significant undertaking. However, our experienced team at PEM Corporate Finance is well placed to guide you through the process. If you are considering buying, selling or raising funds for your business please  contact our expert PEMCF team, and they will be happy to assist you in meeting your goals.