Previously, I wrote about the need for the purchaser of a business to do due diligence on its prospective acquisition target. As I discussed, due diligence on a business can be split into three sections: legal, financial, and operational. This post will explore what is involved with the financial portion of due diligence.
The financial portion of due diligence involves ensuring (a) that the financial information used to make the decision to buy the business and to determine the purchase price is accurate; (b) that the buyer has a thorough understanding of the target company’s finances so that it can include future potential contingencies in its projections and financial models; (c) that there are no customer collection or cash flow issues; and (d) that the buyer has a full understanding as to any future unfunded liabilities like pension benefits for current and future retirees and promised bonuses to employees. Financial due diligence differs from legal due diligence in that it may require a larger team to conduct. For legal due diligence, the buyer and its attorney(s) are usually the only necessary parties. Depending on the sophistication of the buyer and the size of the deal, it may be necessary to hire accountants or other financial advisers to assist with the financial portion of due diligence. [Read more…]