Due Diligence: Financial Due Diligence

Mar 27

THIS IS THE FREE, REDACTED VERSION OF THE TASKS IN THE M&A REFERENCE MODEL  AND IT IS LICENSED UNDER Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International THE FULL SET OF DATA HAS TO BE LICENSED COMMERCIALLY.  HERE is a full model example for one task.

The task has the following goal(s):

Financial position of the target: analyzed

Net assets of the target: analyzed

Profitability of the target: analyzed

Draft financial integration plan: prepared

The task has the following objectives:

Risk: minimized

Information asymmetry: minimized

Short description of task Financial Due Diligence:

Financial due diligence deals with the existing and future earnings situation, assets, financial position, and all processes and application systems that use, control, and monitor financial resources.

The task uses the following business object types:

Business registrations and business licenses, Extract from the commercial register, Management reports, Annual financial statements, Annual reports, Macroeconomic Forces, Profitability of the target, Cash flow of the target company, Working capital of the target company, Net assets of the target,

Questions to be used during the execution of the task

The task is executed with the following questions, among others:

Can you provide the internal and external audits and work papers for the last 5 years and YTD?

Can you share the audit inquiry responses and opinion letters from legal counsel for the past 3 years?

Can you provide the consolidated quarterly financials for the last 5 years and YTD?

Could you share the accounting reconciliation of all accounts for the most recent balance sheet available?

Can you provide the trial balances for the last 5 years and YTD?

Can you describe any off-balance sheet commitments?

Can you provide a description of any contingent liabilities?

May I have the price and volume data by division and product annually?

Can you share the annual P&L by location for the last 5 years and YTD?

Could you provide the locations of accounting records and personnel?

Can you share the accounting policies and procedures?

Can you provide details on raw materials and currency risk management (hedging)?

May I have the historical and projected cost and volume of key material inputs?

Can you provide details on cash balances, including cash in different jurisdictions and accounts?

Could you share the FX details (sales and costs by currency)?

Can you provide the list of Transformation Plan initiatives and savings completed and remaining?

Can you share details on any restructuring efforts, including costs, timing, rationale, and P&L impact (historical and projected)?

Can you provide the 5-year projection model, including assumptions and granular backup?

Could you share the acquisition pipeline for the company, including strategic rationale, expected purchase price, anticipated P&L, synergies, status, and timing?

Can you provide details on new product initiatives strategy, cost, and P&L impact (historical and projected)?

Could you share the detailed capex schedule, including a breakout between maintenance, growth, and new products and acquisition (5 years historical and projected)?

Can you provide the annual profitability by customer for the last 5 years and YTD?

May I have the annual breakdown of sales, volume, and gross margin by product, by region, and by customer for the past three years?

Can you share details on end-market exposure (historical and projected)?

Could you provide the adjusted EBITDA and sales bridges for the last 3 years?

Can you provide the detailed working capital schedule?

Can you share details on product returns, charge-backs, and discounts?

Could you provide a breakdown of the cost of goods sold?

Can you share the SG&A details?

May I have the business plan or most recent forecast, including projections for 5 years?

Could you share a breakdown of operating expenses for the past 3 years?

Which companies belong to the target company and in what way are they linked or do profit transfer or control agreements exist?

Has a target company been involved in bankruptcy, composition or insolvency proceedings in recent years?

Do guarantees or letters of comfort exist?

Which accounting guidelines have been applied?

Which decisions were made regarding accounting policy options?

How are the financial plans generated?

How long does it take to prepare the forecast, budget and medium-term planning? (detailed schedule)

Which information is used as the basis for planning?

What are the most important goals and assumptions for the forecast, budget and medium-term planning and how are they determined?

Who decides on transfer pricing?

Who ultimately decides on the budget and medium-term planning?

Who is authorised to release expenditure and what conditions must be met?

Who has the authority to release capital expenditure and what conditions must be met?

Who participates in the budgeting process and in medium-term planning?

Are there internal controls for financial reporting issues?

Are the company revenues and margins growing or declining?

Are the vendor financial projections for the future and the underlying assumptions reasonable and realistic?

How do the vendor projections for the current year compare with the budget approved by the board for the same period?

Which normalised working capital will be required to continue the business

How will "working capital" be determined for the purposes of the Acquisition Agreement?

How much is the seller investing in research and development?

Which capital expenditure and other investments are necessary to allow the business to continue to grow and what are the seller current capital commitments?

What is the condition of the tangible assets and the liens on them?

Which debts are outstanding or guaranteed by the seller, what are their terms and when do they have to be repaid

Are there any unusual revenue recognition problems for the seller or the industry in which the seller operates

What is the ageing of receivables, the adequacy of the provision for doubtful debts, and are there any other problems with receivables?

Should a report be commissioned on the quality of earnings

Are capital and operating budgets adequate, or have necessary capital expenditures been postponed

Have EBITDA and any adjustments to EBITDA been calculated appropriately?

Does the seller have sufficient financial resources both to continue operations in the normal course of business and to cover its transaction costs between the date of the due diligence and the expected closing date of the acquisition

Do the letters from the auditors give cause for concern?

Do the letters from the legal advisers to the auditors give cause for concern?

Does the vendor have net operating losses? How much is available to the buyer after closing?

What are the typical seasonal variations in revenue and working capital requirements of the company?

Which applications are used in the financial sector?

Which detailed functions are implemented in SAP applications? FI-GL (General Accounting), FI-LC (Consolidation), FI-AP (Vendors), FI-AR (Customers), FI-BL (Bank Accounts), FI-AA (Asset Accounting), FI-SL (Special Purpose Ledger), FI-FM, CO-OM (Overhead Cost Management): Cost Accounting (cost element, cost center), activity type, Activity-Based Costing, overhead order, information systems), CO-PC (Product Cost Controlling: Product Cost Planning, Product Cost Accounting, Actual Cost Calculation, information systems), CO-PA (Profitability Analysis and Market Segment Calculation)

Which complementarities arise in the financial area and how can these be converted into synergies?

Could you provide the historical accounts receivable schedule?

Can you list the top 20 past dues?

What details are available on any recognized bad debt expense, write-offs, and recoveries?

Could you summarize the composition of inventory for the last 5 years?

Can you provide a list of products as of the most recent balance sheet date?

May I have the detailed inventory valuation report as of December 31 of last year?

Can you list the inventory, including the result of the last stock physical count, reconciled with the accounting balance at the date of the physical count?

What are the details of any inventories maintained offsite?

Could you provide a breakdown of inventory by classification (finished goods, WIP, raw materials)?

What information is available on inventory aging?

Can you provide a list of all banks with which the Company maintains financial and commercial relations?

Could you provide a detailed debt schedule?

May I see the promissory notes?

What are the details of the loan agreements?

Could you provide the equipment/other lease agreements?

Can you provide the bank reconciliations for the past 3 years?

Could you provide a summary schedule showing the composition of the Company's fixed assets with the most recent data?

Can you provide a schedule showing owned and leased assets?

THIS IS THE FREE; REDACTED VERSION OF THE TASK IN THE M&A REFERENCE MODEL: THE FULL SET OF DATA HAS TO BE LICENSED

Karl Popp www.drkarlpopp.com