Financial Due Diligence: How To Best Prepare and What Every Business Owner Should Understand

- by Kathy Antipuesto

Financial due diligence is important for any business owner looking to raise capital, sell their business, or acquire a new one. It involves a thorough examination of the financial plan & projections, financial statements, and other financial information with the goal of assessing the financial health of the business. The goal is also to be able to ensure that the financial information presented is accurate and complete, as well as identify potential risks and even opportunities. Financial due diligence aims to ensure that the investor or purchaser understanders the risks associated with the business and are comfortable with moving forward with the pending deal terms.

The outcome of the financial due diligence process can mean the difference between moving forward with the deal under current terms, re-negotiated deal terms, or no deal at all. Therefore it is crucial to be properly prepared for the process to best position your business for the ideal outcome.

So, let’s discuss how to best prepare for financial due diligence and what you, the business owner, must understand about the process.

 

What is financial due diligence?

Financial due diligence is a comprehensive review examination of your business’s financial position and other relevant financial information to assess your business’s financial health, identify potential risks and opportunities, and ensure that the financial information presented is accurate and complete.

 

Who are the main parties involved during financial due diligence?

During financial due diligence, several parties may be involved depending on the specific transaction and the scope of the due diligence. Here are some of the key players that may be involved:

  • The buyer/investor: The buyer or investor is typically the party leading the due diligence process. They will usually hire a team of experts or a due diligence team (i.e., financial experts, lawyers, accountants, tax advisors, etc.) to conduct the review and provide recommendations based on their findings.
  • The target company: The target company is the entity being reviewed during the due diligence process. They will need to provide access to their financial information and be responsive to requests for additional information. The target company may also have advisors, such as financial experts, lawyers, and accountants, who can assist in preparing the financial information and responding to requests from the due diligence team.

And now for the exciting part!

 

How to best prepare for financial due diligence?

As a Finance Savvy CEO™ knows, the place to start when preparing for financial due diligence is your business FINANCIAL PLAN. This is CRITICAL to showing the buyer or investor what is possible for your company vs what has already happened. If you’re in a situation where your historical financial performance shown on your financial statements aren’t the best representation of what you could or would do with adequate funding, then a strong financial plan is even more important.

 

Once you have your financial plan, preparing the following will be easy for you:

1. Products/Services

Identify the products/services you are offering, including pricing structure and target markets.

TAKE ACTION NOW: 

Create a detailed listing of products/services along with their Pricing structure

2. Markets

Identify your target market. Determine how big is your target market.

TAKE ACTION NOW:

Create a list of new target markets you can expand into (Focused Market – Buyer Persona/Target Market)

3. Customers

Identify what customers/deals you have in your pipeline.

TAKE ACTION NOW:

Create a list of your customer acquisition strategies

4. Processes

Identify how much capital you need to take advantage of the opportunity in front of you.

TAKE ACTION NOW:

Determine what you are willing to give up for that capital.
Determine what it will cost you to acquire your target market/customers.

5. Key Performance Indicators (KPIs)

Ensure you have established your KPI Dashboard.

TAKE ACTION NOW:

Triple-check if you are looking at the correct drivers in your business
List the risks that could negatively impact your business

6. Financial Strategy

Prepare your financial records and historical financial statements for the past 3 years that are available which will (hopefully) inform the financial strategy you have employed in the past and support the rationale for your go-forward financial strategy.

TAKE ACTION NOW:

Gather you documents that will support your historical financial strategy:

 

CONCLUSION

The goal of financial due diligence is to identify any financial issues or discrepancies that may affect the value of the company or the investment and to help the buyer or investor make an informed decision about the transaction. This process can be time-consuming and complex, but it is a critical step in any acquisition or investment decision to mitigate risks and ensure the financial viability of the company. Overall, financial due diligence involves a collaborative effort between multiple parties, and it’s essential to be very well prepared, have open communication, and collaborate to ensure a thorough and successful process with an ideal outcome for all.

If you are actively in the process of going through a potential merger & acquisition or capital raising and need a financial expert to support you in navigating due diligence with the VC, click here, and 101% support will be provided across the full M&A cycle.

 

BONUS: To make sure that you are 101% ready, download this checklist now and get prepared to nail your financial due diligence!

Download Checklist

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