Financial due diligence involves the investigation and analysis of a business’ finances, often going beyond accounting and incorporating a detailed assessment of financial, tax and operational risks.
So enough of the dry technical description; what does that actually mean?!
It can mean whatever you want – every assignment is different and specifically tailored to the requirements of our client and what concerns them or what they want to know:
- Are you concerned about maintainable EBITDA?
- Cash available to service debt?
- The level of customer concentration?
- Or indeed the revenue recognition policy being used?
At RG we have an experienced team of 5, and over the past 12 months we have undertaken over a dozen financial due diligence assignments, on behalf of acquirers, banks, PE/VC funds and management teams, on a variety of businesses across a range of sectors including manufacturing, education, e-sales, financial services, recycling, legal services, staffing and marketing.
Our relevant recent findings generally fall into the following categories:
- Where we identified additional cash outflows to be factored in post-acquisition
- Where we identified new factors/risks which lead to a change in price paid and/or payment terms
- Or where we identified something which was ultimately a dealbreaker.
Specific findings have included:
- Accounting teams lacking the necessary skills, or where there have been recent and upcoming changes.
- Revenue recognition accounting policies – occasions where businesses have not been deferring income correctly.
- Current trading factors which have increased risk, including over-reliance or increasing reliance upon a particular product or customer, and key trading relationships concentrated with a small number of employees or even outside of the business with consultants and third parties.
- Future costs or liabilities excluded from the balance sheet. Examples of off-balance sheet items include dilapidations, re-organisation cost, lease commitments and capital commitments signed pre-balance sheet date.
- Methodology used to value working capital items, including WIP/stocks, debtors and creditors, not being reasonable and/or consistent with the acquirer’s policies.
- Provisions not updated on a timely basis during the year.
- Ongoing HMRC enquiries or where targets have been involved in tax schemes, including film scheme partnerships, disguised remuneration schemes and dividend replacement schemes.
- Recent Court judgements or pronouncements which affect the business and add additional costs.
If you’d like to know more about financial due dilligence, or if you’d like to find out more about out transactional support services generally, then please do get in touch.