16th October 2020Financial due diligence – is it really necessary?

If you are considering making a business acquisition you will no doubt have considered the legal requirements in terms of negotiating a sale and purchase agreement and legal due diligence to ensure basic ownership issues are satisfied, but have you also considered the benefits of financial due diligence? Or the risks involved of not undertaking effective and suitable financial due diligence?

Corporate acquisitions or investments in significant shareholdings by corporates or individuals involve a significant degree of risk, some of which can be mitigated by quality due diligence.

What is financial due diligence?

The Oxford Dictionary defines due diligence as “a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential”. An effective due diligence process should provide a buyer with sufficient information to:

• Confirm an acquisition strategy and whether the target fits that strategy;
• Make an informed decision as to the reliability of the target’s business plan and financial forecasts;
• Verify that the target’s assets and liabilities are as expected;
• Confirm the key income drivers of the target;
• Evaluate opportunities for improvement post acquisition;
• Provide opportunities to re-negotiate purchase price if unexpected information arises;
• Ensure appropriate warranties are included in the sale and purchase agreement.

This all sounds like great information to have in an ideal world, but due diligence obviously comes at a cost, and many people may wonder if the benefits really outweigh the cost.

Is financial due diligence really worth the cost?

The simple answer is yes….but only if your advisers understand the nature and size of the transaction and the key objectives of the due diligence exercise, such that they ensure that it is tailored to the risks involved and the appropriate level of work undertaken to mitigate those risks without disproportionate cost.

The key word here is ‘due’ diligence, as the level of work undertaken should match the size and complexity of the transaction, meaning the cost should be appropriate too.

A well planned and executed due diligence exercise should provide a potential buyer with comfort that they know what they are getting into. It should help you establish the true value or cost of an acquisition and give you the ability to negotiate the terms of acquisition which work for you. It should stop post acquisition surprises and allow post-acquisition trading to continue smoothly allowing future strategy to be implemented as early as possible. It should highlight risks and ways to mitigate them.

A high quality financial due diligence report will give a buyer piece of mind that an expert opinion has been given as to the financial position and risks involved in the acquisition target. It is usual to seek to mitigate risk in all areas of business through the use of insurance policies and obtaining expert opinions on high risk matters; a financial due diligence on an acquisition is a way to mitigate risk.

Knowledge is power, and in the world of business acquisition, effective due diligence provides the information and knowledge to complete acquisitions on the right terms and with the right post acquisition strategy in place.

HW Fisher Transaction Services Department

We have an experienced transaction services team who have a wealth of knowledge and experience in undertaking due diligence transactions of varying sizes. All our work is tailored to the specific requirements of our client, bearing in mind the size and strategic objectives of the transaction, the client’s own knowledge of the industry and business to be acquired and level of risk associated with the transaction. By targeting our work based on the risk and objectives we are able to keep costs proportion to the deal, whilst still providing the key information required.

Our transaction services team are also experienced in advising on all aspects of the acquisition process, so are available to get involved at any stage and can assist with negotiating the heads of terms and share purchase agreement and advising on suitable warranties. Additionally our Corporation Tax department can assist on any tax matters associated with an acquisition.

Please do get in touch if we can assist with a transaction.