Financial due diligence is an objective investigation, typically commissioned by investors and undertaken by independent accountants, into the business operations and associated financial information of a target business.
The resulting report should go beyond the financial facts surrounding the business under investigation to highlight issues for consideration prior to making an investment and giving recommendations on possible courses of action in respect of those issues.
Agreeing the scope of the financial enquiry is key. Investors and their advisers should work together to identify risk areas in the target business and then build the specification of their work around those areas.
It is important to understand what drives the business. Often a business’s fortunes are closely aligned with the personal ambitions of its management. The due diligence report should help investors assess the importance of these people to the business and their motivations for seeking additional capital.
Forecasts of future activity require careful consideration, especially by reference to historical accounts. If the assumptions for the future are very different from the past, consideration has to be given to the question of whether it is reasonable to expect such changes.
At its best, financial due diligence can provide a real insight into what makes an operation tick. At worst, it does nothing more than regurgitate the already available financial information.
Investors should ensure that they have a clear understanding of the financial risks associated with a possible investment by engaging investigation accountants who will do more than just report on the financial results of a target.