Due diligence is the investigation or exercise of care which a business or person is takes before entering an agreement or undertaking a potential investment by confirming its facts.

While the term Due Diligence is often used with corporate restructuring activities, like amalgamation and internal restructuring, but also performed in cases of venture capital financing, lending activities, etc.

This Due Diligence is classified under various spheres of:

• Operational Due Diligence
• Financial Due Diligence
• Tax Due Diligence
• Information System Due Diligence
• Legal Due Diligence
• Environmental Due Diligence
• Personnel Due Diligence

Out of these varied kinds of due diligence, the most critical of all aspects for a business to be judged upon lies with Financial Due Diligence.

Financial Due Diligence(FDD) is a deep analysis of a company’s historical and forecasted trends to confirm the relevance and veracity of these trends.

It gives an insight into the company’s financial performance and its ability to generate profits, helping analyze the prospective outcomes of entering an agreement for a product or company.

Here are a few must have evaluations to cover a Financial Due Diligence and should include the following procedures.

1. Looking Through the Business History

The principal aim of Financial Due Diligence is to look at the initial information provided by the entity and assess the benefits and the cost of the proposed scheme intended.

An eye into the history of the target company may reveal its turning points, survival strategies, product lifestyles and its overall regulatory requirements along with its breaches on the entity.

2. Understanding the Line of Industry

Their products, product market, and marketability, whether full capacity is being achieved. These may belong majorly to the Operational Due Diligence; however, they own impact on company finances and business sustainability.

Valuation of Goodwill and with its survival in market along its competitors is one such deciding point.

3. Economic Environment

Studying impact of economic forces is important for determining the factors responsible for the rise or fall in sales and profits of a business. These factors should be studied and their effect on the business should be judged on consideration of the profits in the past.

A market trend analysis with insight into business dependability on loans and triggering interest based on the inflation trends is one such example. International policies and their impact on the sales/purchases should also be considered here.

4. Accounting Policies

It is important to study the accounting policies followed by the company and ascertaining whether these are appropriate. The target company might have changed its accounting policy in the recent past, keeping in view of its intention. Such changes should be monitored and dealt with. Financials should be checked for Disclosures which are not a part of the general Financial Statements but have a great impact on the existing business finance.

5. Examining Profit Or Loss

The profit-and-loss account for the past few years should be considered and studied to understand its trend in sales and associated profit. Any unusual peaks should be audited for.

There should also be a check on the taxes paid and the arrears should be addressed with immediate effect. Gross profit/Net Profit margins should be analyzed here.

6. Examining the Net Worth

Determining the net worth is a crucial step for due diligence and ascertaining the true value of a business. If the accounts are audited, reliance must be placed on the books.

For valuation of tangible assets, help of known experts in the field can be sought, enquiries on unrecorded assets and liabilities should be checked upon.

Thus, adding on value to engagements, with financial due diligence services, we can provide valuable information/insights about financial performance of the organization before any deal closures with reasonable evidence on its sustainability and reliability in the market.