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 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.
When done properly, 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