The buyer's quality review of the finances is one of the important steps in an acquisition. In this situation, the buyer wants to ensure finances and that the business has actually generated and can achieve the results presented by the seller. The buyer needs to know, for example, what costs will be added and ensure that he receives the result and future cash flow that appears from the seller's accounts.
Who: The buyer should hire experienced DD experts such as their own controllers or external controller consultants or an auditing firm. The DD experts' task is to go into a relevant level of detail and present excel and word reports to the buyer on quality, accuracy and identified risks.
What: The DD experts produce a list of documents and analyzes needed to verify the results presented by the seller. It is reasonable that they use a few days to a week with reviews with the CFO, business area manager and CEO at the buyer. With questions and reviews, more in-depth analyzes and follow-ups down to detail where needed. The DD experts are expected to double-check all the important information needed to secure the submitted performance information and evaluate the reasonableness of future budgets.
When: The buyer's strategic analyzes and decision to proceed with the acquisition precede the phase we are in here. This part of the process therefore usually begins immediately after a Letter of Intent or when the Data Room is opened. Verifying the income statements and balance sheets that the business has generated to date is the first analysis step that is carried out. If it turns out that the information can not be verified until now, it is not certain that the buyer wants to continue to spend additional money on resources such as lawyers and others. Once historical income statements and balance sheets have been verified, the buyer proceeds to ensure the reasonableness of future budgets and begins legal parts such as contract texts.
Why: The quality review of the finances and the accounting in a due diligence is to be regarded as "good practice". It happens that the seller is less good at presenting his historical ability to generate results. It is not necessarily that the seller is trying to mislead, in some cases they do not have sufficient accounting skills. Reports and accounts must be prepared in accordance with laws and regulations and presented in an accepted manner for language and details. It is an advantage for both buyers and sellers if the accounts are fair and of high quality, when no major negative adjustments due to errors need to be made, this point can easily be ticked off in DD.
Some examples of points in the quality review of prepared accounts:
Revenues and expenses are accrued in the correct period
Accrued expenses have been deducted from the result
Advance payments have not been profit-deducted prematurely
Depreciation and write-downs of customer and project losses have been made
Closed branches of business and offices may have costs that come in the future
Profitable business lines are about to cease
Unoccupied employment will generate costs
That the right salaries, holiday salaries etc for owners and people who have incentives on a sale are booked
Provisions for pensions, severance pay or disputes with staff have been made
Provisions for disputes with customers and suppliers have been made
Rights of use and licenses exist and are paid for the IPRs used
Taxes and fees are correctly reported and paid
Shareholder, acquisition or divestiture agreements that contain future costs
When it comes to DD for future budgets and forecasts, Strandgården deals with this in more detail in another blog on the website. In terms of overview, however, some can be mentioned in addition to the above.
How reasonable are the submitted budgets in relation to previous periods' results
What does a best case, most likely case scenario look like
Shows customer satisfaction surveys that customers will stay
Are there change of control clauses in important customer and supplier agreements
What is the risk of key people and high-paying consultants quitting?
What investments and reductions in cash flows will come in the future
Assessment of how market trends and competitors will affect
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