The financial due diligence process plays a crucial role in the case of mergers and acquisitions deal. The mergers and acquisitions terminology is used to explain the consolidation of organisations or assets using various financial transactions. When two organisations want to benefit from the synergy in operation, they indulge in this consolidation process. A financial due diligence process helps to provide a comprehensive picture of the economic well-being of the prospective organisations to various stakeholders, including prospective investors.
Understanding Financial due diligence
Financial due diligence takes a sophisticated approach to evaluate an organisation’s financial health after studying the historical data and assessing the key parameters. The economic data of a prospective company being acquired is thoroughly analysed based on its current and past financial records. A typical financial due diligence reviews financial statements, capital expenditure, balance sheet, total asset and liabilities, cash flows, future projections.
Financial due diligence is usually carried out for mergers and acquisitions deal, and there are two parties involved. Broadly, there are two types of financial due diligence; buy-side financial due diligence and sell-side financial due diligence. For the buying party, it is mandatory to conduct due diligence on the prospects to find if it’s a profitable deal. The company being acquired conducts sell-side due diligence to figure out any abnormalities which might affect the deal. It is a precautionary measure usually taken before the buying party gets involved.
Practical Tips for Hiring the Best Financial Due Diligence
You must hire an experienced financial due diligence service provider if you don’t want to miss out on the best M&A deals. It doesn’t matter if you are opting for the services as a buyer or a seller. Both have to gain from choosing a reliable and experienced service provider equally. Some of the most important considerations are mentioned below:
1. Clientele
The first and foremost thing one should look out for before hiring a financial due diligence firm is its clientele. It would help if you did your research about the firm you want to hire for conducting the due diligence. It is crucial to check the clients they have worked for in the past and how reputed are those organisations. This will also give you a fair idea of whether they have adequate experience in your particular industry.
2. Past Performances & Industry experience
The financial due diligence experts will help you judge a prospective company based on its historical financial performance. It would help if you also did the same before hiring a financial due diligence firm. It would help if you looked out for their success rate based on the deals they have assisted with in the past. This will give you a fair idea as to how much they know about your particular industry. It would help if you always opted for service providers who have the knowledge backed by experience for your business.
3. Professional Qualifications
Before finalising a financial due diligence firm, always communicate with the team that will work with your business. It would help if you also looked for their professional qualifications to assess their financial acumen. It also enables you to figure out if they have a detailed understanding of what they are doing. However, it should not be your only benchmark as some financial advisors might not have the certifications, but their experience compensates for the same.
4. Communication Barriers
Effective and timely communication should be non-negotiable for hiring a financial due diligence team. Since this process takes a qualitative approach and factors in the discussions with the management, the team should convey and understand the intricacies involved. It would help if you looked out for any communication barriers that exist. Also, not all stakeholders will have a sound knowledge of financial metrics, so they should explain the details thoroughly.
5. Compensation
How much are you willing to pay for hiring a financial due diligence firm? You should conduct your research about the industry-standard charges before hiring a service provider. You should choose one as per your requirements and budget. However, compensation should not be the only factor in hiring your due diligence team because experienced service providers might charge a premium, and it’s justified.
