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Financial due diligence provides valuable information to support a fair purchase price and ensures the appropriate warranties and representations are included in the purchase agreement. It also identifies the issues the purchaser and vendor should address to complete a successful transaction.
Financial DD is important because a company’s financials help a buyer determine whether a target is viable from both a financial and business standpoint.
In addition to what has been mentioned above by other participants, FDD is important for both buyer and seller as it will be the ground basis for the negotiation process or phase.
Financial DD is one of the very first areas where buyers would like to investigate whether the financial numbers which have been presented are fair or not.
Financial due diligence is vital in mergers and acquisitions in that it offers the buying entity with an insight of the inner operations/workings of the target entity. The purchasing entity the financial position of the target firm, decipher the aspects not recorded in the financial statements as well as uncover such aspects as the unreported liabilities, potential risks, problematic contracts among other aspects. Other vital aspects that the buying firm will uncover include intellectual property issues, customer base as well as the target firm’s strategic fit to the purchasing company business line. Through this analysis, the buying firm can then determine whether or not to purchase the target and if they do so at which price.
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