Financial due diligence involves a buyer realistically assessing a company’s assets, earnings and liquidity position.
Most important to both buyer and seller is the company’s expected future earnings strength and cash flow. Sellers will have already examined their company in detail in terms of earnings and liquidity strength before the sales process. Prospective buyers will adjust their willingness to pay a purchase price on the basis of the earnings strength and any earnings and cash flow risks they identify in the financial due diligence process.
The financing structure is also of interest to buyers. In this context, prospective buyers will particularly check whether liabilities need to be repaid in the short term. Such repayments might have to be refinanced by the buyers.
Finally, in the financial due diligence process, prospective buyers will also evaluate the assets of the company or the business operations, in particular in the case of an asset deal. In a share deal, the essential criterion for the purchase price is the expected future income and not the value of the assets, but the condition of the assets provides information about the performance of the company as a basis for the income value. A possible investment backlog could have a negative impact on the continuation of business operations, on expected earnings and on future cash flow. If the utilization of assets depends on specific contracts or even property rights, the value of the assets may be significantly affected as a result and earnings may be jeopardized. In such cases, the outcome of commercial due diligence and legal due diligence will affect financial due diligence. Watch out for such cross-effects when evaluating companies. The examination of intangible assets is also a component of financial due diligence. Assessing the value of intangible assets often requires extensive insight into the industry and a special level of sensitivity. Here, too, commercial due diligence, legal due diligence and also technical due diligence have an impact on financial due diligence.