Financial due diligence is a review engagement generally requested by investors to conduct a financial review of the concerned company. It is usually done to identify any hidden liabilities of the firm.
In some instances, investors purchase shares of a company not to gain from the current profits or financial circumstances, but from future growth prospects of the company.
Through this process, the forecast for the company’s future is made. It provides a comprehensive estimate of the company’s future before investors.
When should Financial Due Diligence be conducted?
The complete process of conducting this process takes a period of two to four weeks. However, time usually depends on the size of the business concerned.
Commencement of the process takes place when an investor is considering an acquisition, buying a significant number of shares or showing intent for a partnership.
Who should be conducting the activity?
Usually, the third party with expertise and experience of conducting financial due diligence is hired. Investors’ team of experts can also perform the activity.
There are a few added benefits of hiring a third party –
Unbiased opinion from a third party.
Hiring a team of professionals who have the right expertise and experience
Your in-house team will not be overburdened and hence, less likely to make any mistakes during the investing venture.
Information for evaluation
There is no set process to conduct Financial due diligence. It depends on company to company how they wish to go about the process. Therefore, there are no strict requirements for the procedure. There are a few necessary documents, additionally depending on the company’s records and demand of the part conducting the process. Mandatory reports include trial balances, financial statements, business plans and mergers, general ledger, management reports, operating results and projected financial analysis of accounts.
What does it show?
Financial due diligence represents an accurate analysis of the prospects of the company and whether it is a wise decision to invest. Here are a few particular questions it answers –
Ensuring all records provided by the company are up-to-date and accurate.
Whether historical earnings and cash flow will be sufficient for the future.
The extent of capital investment and expenditure done by the company.
Checking for liabilities that exist but have not been included or reported.
Potential future earnings of the company
The finances necessary for all working capital requirements at the company.
Any future commitments and contingencies of the company.
All these factors help the investor determine the price of the acquisition of the investment.
Business economies are always volatile, amassing detailed data on the financial condition of a firm you choose to invest in, will only equip you better for unfavourable circumstances. This is why, according to experts, it is prudent to conduct financial due diligence even for a company with seemingly sky-rocketing growth.
In the end, conducting the process will cost far less than the loss incurred due to investing in the wrong company. Ideally, for financial due diligence, the expert opinion of a third-party with no stake in the investment is the right way. Be prepared for anything that comes your way, and only trust the best financial due diligence services in Delhi.