What Is Financial Due Diligence?

Due Diligence Investigation, also known as prudent investigation, generally refers to the fact that after an investor has reached an initial cooperation intention with the target company, after consultation, the investor conducts an on-site investigation of all matters related to the investment of the target company, A series of data analysis activities. It is mainly carried out during capital operation activities such as acquisition (investment), but when a company goes public, it also needs to conduct due diligence in advance to initially understand whether it is eligible for listing.

Financial due diligence

Contents of due diligence: Generally include: industry research of target company, business owner, history, human resources, marketing and sales, research and development, production and service, procurement, law and supervision, finance and accounting,

1. Can fully reveal

1. Financial professionals joined the project team after the project was initiated to implement financial due diligence

2.The formulation of the plan should be based on a thorough understanding of the investment purpose and objectives.

1.Independence principle

(1). Project

Dual management of project team finance professionals

1. Review Review the financial statements and other legal, financial, and business information, and find key and significant financial factors.

2. Analytical procedures Analyze the data obtained from various channels and find abnormalities and major problems. Such as trend analysis and structural analysis.

3. Interview and fully communicate with all levels, functional personnel, and intermediaries within the enterprise.

4. Intra-group communication The members of the investigation team come from different backgrounds and professions, and their mutual communication is also a method to achieve the purpose of the investigation. For example, in investigating the basic situation of an enterprise, the financial investigator consulted the

Survey of overall financial information of target companies

When conducting financial due diligence, the first thing you need to know is some basic financial situation of the target company. By obtaining the target company's

The purpose of financial due diligence is different from financial audit: 1. Financial due diligence is only

The situation of the target company includes:

1. Internal situation of the enterprise (

1. Purpose:

(1), hired for due diligence, not for legal requirements

(2) Intermediaries are to assist investigators to complete investigations, not to complete audits or

1. Basic information of accounting entities (1), obtaining business license, capital verification report, articles of association,

(1) A written report should be submitted after financial due diligence;

(2) The department responsible for financial due diligence must be established

1.Professional assistance for investment solutions (1),

Faced with various financial pitfalls in the process of mergers and acquisitions, in order to minimize and avoid the risks of mergers and acquisitions, it is very necessary and important to conduct due diligence on the target company before the merger and acquisition begins.

Due diligence refers to the detailed investigation of the target company's background, finances, operations, etc. by the acquirer and acquirer, and to report the results of the investigation in writing or orally. Due diligence is a very broad concept, but there are two types of due diligence,

One is financial due diligence;

The second is legal due diligence.

Both have their own focuses.The function of financial due diligence is mainly to enable the acquirer and the acquirer to determine the authenticity of the accounting statements provided by the target company, and to obtain important information in some areas that are easily overlooked, such as guarantee liabilities, receivables quality, and legal proceedings To avoid mistakes in decision-making due to information distortion, at the same time, understand the earnings of the acquired company through various financial data and ratios, and make correct judgments.

As an important part of the acquisition activity, the role of due diligence has the following three aspects.

1. Conducive to reasonable assessment of M & A risks

In M & A activities, the M & A enterprise may face risks from all aspects of the target enterprise. First, it may face the moral hazard of the target company, that is, the target company provides false operating information and exaggerated operating performance, or deliberately conceals major facts that may lead to the failure of the acquisition, such as litigation facts and external guarantees; second, it may face the target company's Financial risks, such as excessive asset-liability ratios or large amounts of non-performing assets; third, they may face the operating risks of the target company, such as imperfect sales networks and outdated production technologies; fourth, they may face legal risks, mergers and acquisitions Many aspects of the transaction itself are subject to the supervision of current laws. M & As often touch on issues such as labor law, intellectual property law, and environmental protection law. There are other risks that are difficult to foresee in mergers and acquisitions integration, such as serious conflicts in corporate culture, strong resistance of major operators or employees, and so on. These factors are bound to increase the risk of post-acquisition integration.

Through due diligence, it can help the acquiring company to obtain more high-quality information including financial, personnel, management, and market, thereby alleviating the asymmetry of information and minimizing the causes caused by lack of information or information errors. risk.

2. Provide a basis for determining the purchase price and conditions

In the process of acquisition negotiation, the focus of both parties generally focuses on the determination of the purchase price, but the price is based on the estimation of the value of the target company itself. If it is found in the due diligence that the acquired company has a large number of contingent liabilities and non-performing assets, the acquirer can evaluate the contingent liabilities and non-performing assets one by one, which can be used as the basis for negotiating the purchase price with the seller. And determine whether some restrictive clauses should be added to the acquisition agreement.

3. Facilitate the reasonable construction of integrated solutions

M & A is a complex system engineering. Regardless of the motivation, the completion of the acquisition is only the first step to complete the merger. Post-acquisition integration is the key to the success of the merger. Through due diligence, we can know whether the post-acquisition integration can integrate the two parties in management, organization, and culture.