Ask the Advisors: Understanding Buy-Side Financial Due Diligence
Q. As a buyer, what does financial due diligence tell me that I don’t already know about a company I’ve been targeting for an extended period of time?
Buyers often find themselves asking this question after analysts have poured through data in helping them develop an offer. Obtaining an outside opinion from an independent third-party that does not have a deal bias provides the buyer with a deeper perspective into a target, helping them gain a true perspective of what the business might really be worth versus what they want to hear. Performing financial due diligence also can help the buyer further explore areas such as:
Irregularities within a trailing 12-month period and year over year
Unforeseen expenses on the horizon
Working capital adjustments or issues
Independent view of management add backs
True representation of company trends and/or issues based on a comparison of historical data to the current data being presented
Justifying numbers when financing or obtaining capital
Potential synergies available in the deal
Tax-planning ideas and strategy considerations
While buy-side financial due diligence might not yield an adjustment of purchase price, it often provides the buyer with additional ideas or leverage in negotiation of the deal terms.