Financial due dilligence guide

Financial Due Diligence (FDD) là quá trình đánh giá chi tiết và phân tích tình hình tài chính của một công ty (thường trong các giao dịch M&A, đầu tư, hoặc mua bán doanh nghiệp) nhằm xác định rủi ro, xác minh tính chính xác của thông tin tài chính, và đảm bảo giá trị thực của doanh nghiệp. Dưới đây là tổng quan cơ bản:

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Bankers Manapakkam Study Circle

Presenter : Bhama Krishnamoorthy

Date – 29 th August 2017

Time – 5.00 pm to 7.00 pm

FINANCIAL DUE DILIGENCE

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DUE DILIGENCE

•Orderly investigation of complete 360° angle matters pertaining

to business

•Serves as a strong legal defense to third-party claims after a transaction closes Reduce legal issues by alerting an investor to potential liabilities that can be mitigated prior to closing the transaction

•Simply doing your homework Before putting funds, make yourself an expert and investigate to the minutest of details to avoid a bad investment

WHAT

WHY

HOW

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AUDIT VS DUE DILIGENCE

TIMING PURPOSE REPORT GOVERNACE ACCESS

• Pre Mortem

• Facilitation of financial

decision making for investor

• Transaction focused & detailed

• Industry standards & deal scope

•Controlled

• Post Mortem

• Statutory reporting & report to shareholders

• True & Fair view

• Companies Bill, A/c standards

• Full

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TYPES OF DUE DILIGENCE

Accounting Due Diligence:

• Financial & management

accounts analysis

• Compliance with significant

accounting policies & GAAP

• Trend analysis of revenue and

cost

• Analysis of historical trend and

Budgets/ forecasts

• Analysis of historical and projec

ted capex and liquidity ratios

Financial Due Diligence:

• Review of business plan

• Business valuation

• Deal financing for proposed Transaction

• Feasibility analysis and future prospects

• Quality assessment of FSLI’s

Tax Due Diligence:

• Current tax position analysis

• Tax impact assessment

• Historic tax exposure analysis

• Tax saving opportunities

• Identification of tax neutral deal structuring options

Legal Due Diligence:

• Assessment of On balance sheet and off balance sheet liabilities and potential risks

• Mechanics of the proposed transaction mechanics and execution

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•Thorough deep dive analysis of the business plan and also historical financial numbers vs forecasts for making a decision on

a particular transaction

•Avoid unpleasant business performances after acquisition and also to safeguard from any future legal battles

•Understand the true value of the assets and liabilities and find any discrepancies or deliberate book building

•Benefits in negotiation as it helps facilitating better deal terms

FINANCIAL DUE DILIGENCE?

WHAT

WHY

OBJECTIVES OF FINANCIAL DUE DILIGENCE

•Investigation of business affairs

•Verify that the transaction complies with investment or acquisition criteria

•Risk Management

•Opportunity cost assessment of a proposed transaction

•Reduction of post-transaction unpleasant surprises

•Enabler in negotiation and creation of trust between two unrelated parties

•Facilitation of decision making

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MERGERS & ACQUISITIONS AND DUE DILIGENCE

• Using different methods, the investor team tries to find an answer to the question :

“Do we or do we not?”

• To answer this question, the team targets predominantly 4 areas which are:

• Business performance – Historic and future

• Authenticity of Financial data

• True worth of current and capital assets and the lien thereon

• Contingent liabilities & Commitments and guarantees given

• Outstanding and potential litigations

• Nowadays, firms develop in-house due diligence expertise for

• Maintaining internal controls

• Detect any deliberate or erroneous business/ financial activity

• Put forward a good defense in case of any potential M&A deal

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MERGERS & ACQUISITIONS AND DUE DILIGENCE

•Key items to check during due diligence for Mergers & Acquisitions (M&A)

• Trend analysis of company’s financial position for last 3 years

• Is there an independent audit of the company’s financial position?

• Do the FS depict all the current and contingent liabilities?

• Is the business booming or deteriorating?

• Assessment of the authenticity of the operating and capital budgets

• Historic performance vs Forecast comparison and analysis

• What is the normal liquidity requirement for future continued performance?

• What are the current capital commitments and what capex is required for growing business?

• Condition of assets and liens thereon

• Is the depreciation on the capital assets provided for correctly?

• Aging of the accounts receivable and potential bad debts discovery

• Is the EBIDTA and any adjustments properly accounted?

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PROCESS – PRE

• Scope and timelines agreement with client

• Analysis of preliminary information like MoA, incorporation certificates, ownership structure etc

• Understand the micro and macro elements affecting the business of the potential investment – Industry research

• Assessment of the historic business performance and its authenticity

• Co-relate the forecasts with the historic performance and market information

• Liaison with management to validate findings

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PROCESS – POST

•Discussion with client about key findings and future implications

• Issuance of final report

• Structure of final report

• Executive Summary: Draws investor’s attention

• Key positives and negatives

• Main Body: Work done and inferences

• Appendices: Detailed documentation for the work done

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CASE STUDY

COMMON ISSUES SEEN

• Application of Accounting Standards

• Eg 1 : Company recognizes income on cash basis instead of accrual

• Eg 2 : Difference in AS as applicable for investor vs target company

• Contingent Liabilities

• Eg 1 : Insufficient payment of employee insurance/ social security contribution

• Eg 2 : Possible litigation risks due to breach of laws relating to target company

• Related party transactions

• Eg 1 : Providing off balance sheet guarantees to its affiliated firms for the interests of the company rather than for its business objectives

• Income Tax

• According to over-statement/ under-statement of profit, the income tax payments needs to be accordingly revisited

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DUE DILIGENCE DISASTERS

1998 - $40B

2012 - $11.1B

1994 - $1.7B

1994 - £800M

Join forces & create automotive giant

HP to move from computer hardware

to software

Quaker wanted to enjoy similar success

of acquisition of Gatorade

BMW intended diversification &

increase sales

Competitive analysis

Inaccurate FS & cash flow analysis

Intellectual property &

competitive analysis

Inaccurate info on sales & cultural clash

$34B

$5B

$1.4B

£790M

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DUE DILIGENCE SUCCESSES

2006 - $7.4B

1999 - $81B

2008 - $13B

Acquiring Pixar’s computer graphics Technology

Create world’s biggest oil company & cost Rationalization

Pre merger, neither had an annual profit, goal to eliminate duplicated program costs

Successful movies - Toy Story3,

Up, Wall E, Ratatouille whose combined revenue is $3.5B

Remains strongest leader in oil market In 2008, bagged all 10 spots in “Top 10 Corporate Quarterly earnings”

Q4 2009 reported profit for first time, has 30m subscribers as on Q1’16 and has/ had celebrity Shows hosted by Jim Parsons, Oprah Winfrey, Martha Stewart

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On a lighter note… (Joke, Joke!)

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THANK YOU!