Due diligence is an audit or investigation of a potential investment for an investor to provide some level of assurance on the investment. Often purchase agreements are dependent on such an investigation before finalisation of the agreement. This is the process by which the investor is satisfied that they are purchasing what they have been presented with.
Given the amounts of money involved with business purchases it is important to perform comprehensive and open investigations. You can place your future investment at risk when not performing comprehensive assurance of the financial facts and figures surrounding the entity.
The most important type of due diligence is the financial due diligence that seeks to check whether the financials showcased are accurate or not. Financial Due Diligence aims to provide a thorough understanding of all the company’s financials, including audited financial statements for the last three to five years. Unaudited financial statements will be compared with statements of the last year, and the company’s projections, capital expenditure plan, schedule of inventory, debtors and creditors will be examined.
The financial due diligence process also involves analysis of fixed and variable cost analysis, analysis of profit margins, examination of internal control procedures and customer accounts. Due diligence can also incorporate an examination that is focused on short-term and long-term debt, applicable interest rates, the company’s ability to service its outstanding debt and an overall evaluation of the company’s capital structure.
The Accounting Team develops due diligence reports for existing companies as well as acquisitions. A comprehensive due diligence report will place the owner or buyer in a position of power to fully understand the standing of a company and its true worth.