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What does Every Entrepreneur Need to Know About Financial Due Diligence?

by Nathan Zachary
Covenant Analysis

Keeping a check on internal business practices can help identify the prevailing anomalies. Therefore, it’s essential to do regular due diligence to stay on top of all organisational developments. Different types of due diligence activities are carried out to evaluate various aspects of business operations. Financial due diligence is among the most crucial due diligence activities that every business needs to conduct. 

Financial due diligence has a unique role in facilitating mergers and acquisition deals. The company acquiring and the target firm must conduct their financial due diligence to find the right bargain. In addition, there are other essential benefits of conducting financial due diligence. Therefore, business owners and entrepreneurs must learn about the process. Read on to learn more about financial due diligence.

What does financial due diligence entail?

Financial due diligence is a process of analysing a company’s financial health based on key performance indicators and financial statement records. It’s a comprehensive financial evaluation process. The company’s historical and current financial data are assessed to learn about its growth/decline. The future projections are also considered to determine the growth scope in the coming years. Some of the most prominent financial data reviewed during financial due diligence include balance sheets, profit & loss statements, cash flow statements, capital expenditures, future projections, etc. 

Types of financial due diligence   

Financial due diligence is mainly carried out before M&A deals where one party is acquiring another. Both parties here need to learn about the financial health of each other to find the right deal. The company acquiring don’t want to pay a higher than the fair amount for the agreement, whereas the target company wants the best possible price for its stakes. As a result, two types of financial due diligence emerge, buy-side due diligence and sell-side due diligence. Let’s take a quick look at both.

Buy-side financial due diligence 

As the name suggests, the buyer does the buy-side due diligence in the deal. So, for example, if company A plans to acquire company C, A will do a buy-side financial due diligence on C. The emphasis is on analysing the company’s financial health by reviewing historical financial data like balance sheets, profitability, revenue, growth, market share, etc. 

Sell-side financial due diligence 

Sell-side financial due diligence is conducted by the target company, selling its stake to another firm. The emphasis is on finding out existing anomalies and financial discrepancies in the company’s records to take necessary corrective actions. It helps to ensure that there are no roadblocks in the deal. A sell-side financial due diligence is more like internal due diligence. 

Why is financial due diligence so crucial?
Financial due diligence can help business owners make insightful decisions. It can help them find good prospects and close the most profitable deal. Determining the correct value for sale is crucial for most M&A deals, and financial due diligence plays an indispensable role in this scenario. Hiring the right financial due diligence consultant can be a game-changer. Get the right financial advisor today!

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