Financial Due Diligence: A Thorough Guide on What to Expect

We have tips on how to improve the Due Diligence results, so read ahead!

Due Diligence is one of the fundamental stages in an asset purchase. It involves a complete and comprehensive check of a business ordered by investors. The objective is to assess the attractiveness of a potential asset and estimate the risks associated with its purchase. Although it may be a legal obligation, it is most commonly performed as a voluntary investigation.

If your company has faced the need to go through financial Due Diligence, you must be wondering what the procedure includes. In this comprehensive guide, you will find out how the procedure goes, what consequences the negative information may have, and how to perform Due Diligence preparation.

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Financial Due Diligence Procedure Described Step-by-Step

Nowadays, when over 80% of corporate value consists of intangible assets, most of which are business data, it is crucial not to underestimate its importance in organizational valuation. Due Diligence is a check that takes into account the asset’s operational, tax, legal,  marketing, and financial components to make sure that the transaction will be profitable for the investor.

Financial Due Diligence focuses on:

  • Checking company’s income and expenses;
  • Checking company’ debts, loans, and liabilities;
  • Researching the dynamics of financial indicators.

Below are the usual steps of the financial Due Diligence process:

  1. Specialists that are responsible for conducting Due Diligence are formed into a team.
  2. All documents on the asset are collected for further analysis.
  3. The Due Diligence team signs the Confidentiality Agreement and requests for all necessary information and documentation from the target company if needed.
  4. All the collected information is verified. During the review process, the specialists determine whether the issues discovered could end up completely canceling the deal or whether the proposal should be changed.
  5. The team draws up a results report based on the conducted Due Diligence. This report contains a summary of the company’s financial aspects, the issues that were identified during the Due Diligence process, and any areas that were found to be satisfactory.

After carefully studying the report, the potential buyer evaluates the transaction and decides whether to proceed with the purchase.

Checklists for Due Diligence

In most cases, organizations have a set list of private equity Due Diligence requirements. More often, it looks like a checklist to showcase the difficulties that have been discovered to the applicant and why they did not pass Due Diligence.

Financial Due Diligence: A Thorough Guide on What to Expect
Source: Deloitte

Here are some financial factors that are usually included in checklists for Due Diligence:

checklists for due diligence

Checklists for Due Diligence may vary depending on the deal and the companies involved. However, considering the vast scale of the procedure, it is impossible to prepare for Due Diligence quickly. If the company takes a month rather than days to send the documents after the investor’s request, it indicates that the company’s documents were a complete mess. Therefore, we recommend that you prepare the documents for presentation gradually.

The Effects of Negative Information Found During Due Diligence

Sometimes financial Due Diligence brings out unexpected results that are considered negative by an investor. The information discovered can change the transaction procedure or its timing. In some cases, negative private equity Due Diligence cancels the deal completely.

Over the course of our working practice, we have encountered a lot of Due Diligence examples with varying outcomes. Here is one case from our experience:

A client that used to run a trading business contacted us. The entrepreneur planned to open a new business in Europe and found partners interested in the venture. The European investors conducted Due Diligence procedures and refused to cooperate. The stumbling block was not negative information or criminal activity, as no such data was found. The European investors have discovered some publications in the media where the entrepreneur appeared as a trader. The investors were reluctant to do business with a trading partner, even though they were interested in the new business idea.

That is why it is crucial to be prepared to demonstrate all the necessary data to investors and have certainty that no information can drastically change the deal’s trajectory.

How to Prepare for Due Diligence?

The simplest way to foresee what potential investors might find about you and your company when they perform Due Diligence is to use Google. For some, the search results will show compromising information on the asset, while in others, the financial data found online seems fine. In any case, it is best to perform a deep check and “clean” all the negative or ambiguous information that could potentially put the deal at risk.

Here are some steps you can undertake to perform Due Diligence yourself:

  • Try to negotiate with the website representatives or content author
  • Ensure that the majority of content is positive by encouraging the publication of more favorable posts
  • File a defamation lawsuit in court
  • Flag content in Google or on social media that violates the law or the platform’s Terms of Service

At Reputation America, we remove information through negotiations – we reach out to the author, admin, resource owner, or hosting and convince them to remove the negative content. We do not hack sites and do not threaten. We also don’t transfer personal information to third parties.

We solve the problem between the client and the source of the negative postings. We find the “pain points” of both parties, negotiate and eliminate the reasons that caused the negative representation. Thanks to our delicate technique, we remove information that is not formally considered libel – in other words, information that cannot be removed as defamatory content through a court order. This significantly simplifies the financial Due Diligence procedure.

Besides this, we offer several scenarios for removing information for the client to choose from. Some other methods we work with are:

  • Deindexing. We will remove a link from the SERP (Search Engine Results Pages). It means that it won’t be found in Google Search or other chosen search engines.
  • Removal. This is a complex of techniques at the intersection of IT, anti-crisis PR, and psychology. We know the right approach to push the removal of information using only legal means with minimal risks of conflict escalation.

We also offer reputation research services. We will provide a report with all the collected data about you or your company after which you can decide what information specifically you want to be removed.

You are always welcome to contact us so we could develop a custom strategy that will fit your business best. Here are some benefits of dealing with us:

  • Working with all sites;
  • Only legal techniques;
  • Strategies are discussed with each client;
  • Transparent KPIs;
  • Safe and respectful to privacy;
  • Lifetime guarantee.

Take a look at our Due Diligence examples of preparation and cases here, and don’t hesitate to contact us for further information and cooperation details!

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