12/7/2014

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MERGERS AND ACQUISITIONS FINANCIAL DUE DILIGENCE

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In the context of mergers and acquisitions the due diligence process covers a wide range of areas including
operations, legal and financial matters. The extent of procedures required under each area is dependent upon
the nature of the actual transaction.

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Technical Updates
Viewpoints

So what needs to be done, why, when and how?

New perspectives
What is a financial due diligence review?
Financial due diligence is not an audit. An audit is concerned with historical financial statements only and provides
an opinion as to whether the financial statements represent a "true and fair" view of the company's operations. A
financial due diligence, on the other hand, would incorporate a greater scope.
A financial due diligence review would not only look at the historical financial performance of a business but also
consider the forecast financial performance for the company under the current business plan and consider the
reasonableness of such forecasts.
Another major difference between an audit and a financial due diligence review is that, where an audit reports
only on the truth and fairness of the financial results, a financial due diligence review will investigate reasons for
the trends observed in operation results of the company
over a relevant time period and report on this in terms of relevancy for the proposed transaction.
Clearly, the scope of each financial due diligence will be unique depending upon the nature of the transaction
and the size of the company or business operations being acquired. In general a financial due diligence would
typically involve a review of the following areas: historical financial results; current financial position; forecast
financial results; working capital requirements; employee entitlements provisions; valuation implications; risks
and opportunities; and taxation implications.
The key to determining an appropriate scope for financial due diligence is clear identification of the risks
surrounding the potential acquisition.
When do I need a financial due diligence review?
Financial due diligence should be undertaken whenever a company is considering acquiring new business (whether
it be by acquiring share capital of an existing company or purchasing the business operations and assets only).
However the benefits of financial due diligence reviews are not limited to merger and acquisition decisions. They
can also be useful in assessing the merits of disposing of certain existing business divisions within an organisation.
A financial due diligence review is also an essential component of assessing investment requirements for venture
capital arrangements.

Who can I instruct?

A financial due diligence review can be conducted either internally, by the acquirers' own accounting and finance
function, or by external independent due diligence experts.
The benefit of using external advisers is that the review is based on an independent viewpoint from a party who
has no direct interest in the outcome of the proposed transaction.
Further, by outsourcing the financial due diligence review, internal resource time can be dedicated to
consideration of operation due diligence procedures such as the logistics of merging the policies and procedures of
both the acquirer and target in an efficient and effective manner.

When should I instruct them?

Ideally, the financial due diligence process should commence as soon as practical when negotiating to acquire a
company or business.
Generally, once a heads of agreement has been drafted setting out the structure for the deal financial due
diligence should begin. Importantly, sufficient time should be allocated to the financial due diligence process as
the outcome of the review may provide valuable information required to ensure a fair purchase price is agreed
upon and, where necessary, the appropriate guarantees and provisos are put in place.

What information will they need?

The information required to complete a financial due diligence review is dictated by the agreed-upon scope as
well as the reporting capabilities of the target company. The main sources of information for a financial due
diligence review include:
Historical financial data including statutory accounts, detailed management accounts and reports
and income tax returns. Where statutory accounts have been audited access to audit work papers
may also aid the financial due diligence process.
Current financial data such as year-to-date management accounts.

http://www.bdo.com.au/resources/articles/advisory/mergers-and-acquisitions-financial-due-diligence

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12/7/2014

Mergers and acquisitions Financial due diligence - BDO Australia

Business plans and forecast financial information (including
budgets and cash flow forecasts).
Minutes of Directors' Meetings and Management Meetings.

What will I get out of a financial due diligence review?

Depending upon the scope of the procedures conducted, a financial due
diligence review should provide answers to the following questions:
Is the information provided by the target/vendor reliable?
Are the historical earnings of the company sustainable?
What are the potential future earnings of the company?
What are the possible synergies associated with the proposed acquisition?
What are the immediate and future tax consequences of the proposed acquisition?
Is the purchase price fair given the results of the due diligence process? Based on the outcome of
the due diligence are there any potential deal breakers, is the structure of the acquisition
appropriate and should any issues such as guarantees be included in the purchase documentation?

The way forward

The due diligence process is not simply following through a standard checklist of procedures in order to provide a
'tick' for a proposed acquisition. When done properly a financial due diligence review provides valuable
information to support the proposed acquisition and identify early the issues that you need to address to combine
companies and businesses successfully. There have been numerous high profile examples that have proven the
cost of performing expert financial due diligence far outweighs the cost of a bad acquisition.
For more information, please contact:
Name: Sherif Andrawes
Email: sherif.andrawes@bdo.com.au
Tel: +61 8 6382 4763

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