Check list for financial due diligence


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    Mingmin Yu

    What are the critical components to a financial due diligence?

    Chuck Adams

    That’s a complex question, haha.

    It depends on where you are in the transaction process. If it’s pre-LOI, for example, I have four major areas we look at:
    1) Financial Statements
    2) Debt/Liability Obligations
    3) Tax Compliance
    4) Valuation

    Everyone can have their own ways of cutting the pie.

    Tarun Kumar

    If you are doing the FDD of Company who’s selling goods on Amazon, following key components should be verified:

    1. Sales reports and its reconciliation with books & statutory records
    2. Settlement reports and the expenditure reconciliation with books
    3. Cost of Goods Sold and Gross Profit Margins
    4. Debtors and Creditors Ageing
    5. Amazon Fees
    6. Tax Compliances
    7. EBIDTA/ Adjusted EBIDTA Margins

    Jennifer Leow

    For companies doing projects, we also constantly ask for updated order book, and compare the margins across similar projects.

    Clarence Yeo

    You may consider the following the financial due diligence checklist:
    1. Income statements (past five years, suggesting the company’s income and expenditure trend)
    2. Balance sheets (past five years, suggesting the adequacy of the company’s assets and liabilities)
    3. Cash flow statements (past five years, suggesting the company’s real cash inflows and cash outflows performance)
    4. Management discussions (around financials, including meeting minutes and emails)
    6. Gross margin (amount of money left after subtracting all direct costs of producing or purchasing company goods or services)
    5. Operating margin (suggesting the percentage of profit the company produces from its operations before subtracting taxes and interest charges)
    7. Net profit margin (net income divided by net sales or revenue)
    8. Interest coverage (earnings before interest and taxes divided by interest expense)
    9. Debt to equity ratio (suggesting how much debt there is compared to assets, and its acceptability varies by industries too)
    10. Asset turnover (suggesting how many sales were generated from every dollar of company’s assets)
    11. Return on assets (suggesting the company’s efficiency level in earning profit from its resources)
    12. Return on equity (net income divided by shareholder equity)

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