Due Diligence: The Anatomy of a Typical Engagement

When buying, merging with, or investing in a business, you must be mindful of identifying and addressing a range of considerations that can affect the outcome of that decision.

What is due diligence?

Due diligence refers to the appraisal of a business undertaken by a buyer before entering into an agreement or a financial transaction with another party. It helps to understand how the business is conducted and how it can be integrated into an existing group of companies. A tailored piece of due diligence will provide assurance on your existing understanding of the opportunity and challenge the commercial and financial assumptions.

The difference types of due diligence

Whilst the most common type of due diligence is financial, there are several others which a buyer or funder may also take into consideration, such as:

• Commercial
• Information technology
• Intellectual property
• Legal
• Operational  
• Management

Financial Due Diligence

When conducting a Financial Due Diligence, you would typically examine the following five main aspects of the business:

1. Earnings Performance

Analyse current and historical information to understand maintainable profit and the value drivers in the business. In the case of a growing business, the last twelve months’ performance will typically be a better indicator rather than looking back to the last available statutory accounts. This then forms the basis of assessing the forecast numbers and the underlying assumptions.

2. Cash Performance

Financial Due Diligence builds on the understanding of the value drivers through to cash conversion. The analysis allows us to comment on levels and trends of working capital, intra-month cash swings and the viability of the debt-equity structure.

3. Assets and Liabilities

The statement of financial position shows what is being acquired within the financial statements. Financial Due Diligence reviews the assets and liabilities to identify items that might require further investigation to determine the quality of assets, unforeseen liabilities and accounting policies. It will also consider whether any further investment is required in capital assets.

4. Off Balance Sheet Items

Financial Due Diligence processes will often investigate off balance sheet items such as contingent liabilities, hedging instruments, leases and capital commitments to assess how these factors will affect the business in the future.

5. Processes and Controls

The assessment of a business’ financial processes and controls determine whether these are efficient, appropriate and robust enough to suit the requirements under new ownership.

How can we help?

At DTE, our Transaction Services team have extensive experience providing Financial Due Diligence to companies, banks, private equity houses, private equity backed corporates and other funders for a range of transaction sizes and types.

Due diligence should be a key element in any acquisition or investment process. We believe that working closely with clients to develop an appropriate scope of investigation that meets their requirements is the most effective way to achieve due diligence objectives.

Contact our team for more information on 0161 819 1910 or [email protected].