Which Questions Need To Be Answered When Completing Financial Due Diligence?

Introduction

A Due Diligence Report: What Is It?

This article describes the topics that should be included in a due diligence report and the inquiries that should be addressed in mergers and acquisitions.  Closing the deal requires the executive team reviewing the transaction to receive a due diligence report, which is issued as an internal memo.

A Due Diligence Report Is Written By Who?

The preparation of the due diligence document might sometimes include numerous groups.  Businesses can use their corporate development team to do the analysis internally, or they can bring in outside counsel in the form of investment bankers or the Due Diligence Team at an accounting firm.

We'll go over a broad questionnaire meant to assist a prospective seller in determining whether their company is prepared for a sale and for Financial Due Diligence (FDD). This material is not intended as financial advice and should not be used in place of thorough, customised financial diligence. The goal is to share my experience with the FDD process and encourage the vendor's management to begin considering the selling process. Since, FDD is not an audit or assurance engagement, it is unable to provide complete protection against overt fraud and misrepresentation by management.

A Financial Due Diligence Report'S Sections

# 1 Business Documents

• Capitalization, authorised and issued stock shares, and seller of each subsidiary;
• Articles of incorporation and bylaws;
• Good standing with the state;
• Obtain a shareholder list and copies of any correspondence with shareholders;
• Determine whether any warrants, options, or other securities that could dilute stock exist.

 # 2 Financial Information

• Copies of the audited financial statements for the previous five years, together with all notes and the management's analysis and discussion
• All board of directors' presentations;
• Copies of the correspondence between the auditors and management;
• A list of the federal and state jurisdictions in which the seller has filed taxes during the last five years; Federal, state, and local tax returns.
• All financial estimates and models created internally

# 3 Debt Investigation of Debt:

• Examine Debt of Seller and Subsidiaries, Including Notes, Mortgages, and Security Agreements;
• Examine Lender Correspondence Showing Adherence to Financial Covenants;
• Order Standard Commercial Code Searches for Every Subsidiary

 # 4 Labour and Employment

• A list of all employees, including their job function, department, location, and compensation;
• A biography of each officer, director, and employee at a certain level;
• Documents outlining any profit-sharing, pensions, deferred compensation, stock plans, and other non-salary compensation or benefits;
• Copies of all employee handbooks, codes of conduct, and policies; copies of employment, consulting, termination, parachute, and indemnity agreements; and
• Pending litigation pertaining to labour and employment law

# 5 Real estate includes the following:

• Copies of all assessments, studies, site evaluations, government filings, and consultant-prepared reports;
• Addresses and legal descriptions for all real estate;
• Copies of title issue rules pertaining to real estate

 # 6 Agreements:

• All contracts made by the business and its affiliates;
• All leases pertaining to real estate; all agreements pertaining to partnerships or joint ventures;
• All agreements pertaining to marketing, sales, commissions, distributors, and franchises;
• All agreements pertaining to brokerage or investment banking;
• All agreements with customers or clients;
• All licences and subscriptions; and
• All material contracts that are not otherwise obtained from this list

#7 Supplier and Customer Data:

• A list of all relevant customers, including the amount and volume of sales;
• A list of all relevant suppliers, including the amount and volume of purchases;
• Correspondence pertaining to complaints or disputes with suppliers or customers

 # 8 Legal:

• Copies of every report and document that has been filed with the government;
• Summaries of all court cases, administrative hearings, and official investigations;
• Copies of all licences issued by the government;
• Audits of environmental compliance and assessments of environmental liabilities

In Summary

Depending on your industry, the due diligence process has a different breadth.

To give a basic example, a company in the manufacturing sector will devote more time to operational due diligence, whereas a company in the technological sector will devote more time to technology due diligence. All businesses, regardless of sector, must prioritise doing their financial due diligence.

If done correctly, it might provide the buyer with an equal amount of information about the target company as all the other due diligence parts put together.