Financial Due Diligence
Due diligence required between audit and business valuation
Due diligence pays off
Due diligence pays off – at least for the buyer: Empirical studies show that the purchase price was reduced in 67.4 % of cases after due diligence and increased in only 5.3 %. In practice, and especially in the SME environment, what exactly needs to be examined is rarely strictly functionally separated, i.e. differentiated into financial, legal, tax and other sub-areas. In general, the aim is to minimise the buyer’s risks. Due diligence assesses these risks and not the company as such, but there are interdependencies.
Whether commercial, tax or accounting issues are being examined, the financial circumstances are always their sounding board. Financial due diligence is therefore a component of almost every transaction.
As diverse as these transactions are, so too is a financial due diligence. Although it will only make sense to start after a confidentiality agreement or a letter of intent (LoI), it depends on the individual case whether the investigations take place before or after a company valuation or possibly only after a purchase price offer. In an early phase, financial due diligence can still serve the decision-making process; later and before the company valuation, it can collect the necessary data. Sometimes purchase prices are set without valuations, in which case financial due diligence can at best safeguard the price.
Read the complete article from EXPERT FOCUS 11|2020 (in German) here.