Due Diligence review

Before being able to commence the due diligence exercise, one must understand and be familiar with the proposed transaction. If possible, one should have access to, and review, the draft purchase agreement, memorandum of understanding, or heads of agreement.

Having understood the proposed transaction, the next step is to determine the scope of the due diligence review. The scope must be very specific, and will be embodied in an engagement letter together with proposed timing and reporting requirements.

Once the scope has been established and agreed, the engagement should be planned, appropriate staff appointed to the review team and checklists prepared.

Review of information

The information reviewed will include:

• Historical financial data.
• Current financial data.
• Audit work paper files.
• Forecasted financial information.
• Confirmations/representations from financiers, debtors etc.
• Business plans.
• Contracts with suppliers, customers and staff.
• Minutes of director’s meetings and management.

It should be clear that due diligence review should not be limited to reviewing documentation. In particular with regard, where possible, much can be learnt about the target from discussion with their staff (formal and informal talks), and generally attending at the target’s premises and observing the ongoing daily activities. It is for this very reason that it is recommended the review be conducted by high-level experienced staff.

Conclusion

The conclusion of the financial due diligence review should provide an overall evaluation of the viability of the target business following the proposed acquisition. The due diligence reports will form a valuable tool for the new owners of the business in providing an overview of the business and identification of areas of weaknesses and threats which will have to be addressed.

Each due diligence review is unique but the overall aim is to provide the investor with sufficient, relevant and timely information in order to assist in the investment decision. The due diligence exercise is not simply a number crunching exercise but involves collation of strategic non financial information which is likely to be crucial in the overall investment decision.

The successful performance of a due diligence investigation is dependent upon the scoping, co-ordination and planning of the review and the use of a highly skilled team.

The cost of the preparation of a quality due diligence exercise fades into insignificance when compared to the cost of a bad acquisition.