Financial due diligence

Financial due diligence - support for buyer and seller

Financial due diligence is not a formality. It's the only chance you have to find out what you're really buying before you close the deal - and to identify risks that can change the sense of the entire investment.

Well-conducted financial due diligence shortens negotiations, provides arguments for price adjustments and protects you from unpleasant surprises after closing. Poorly conducted - or overlooked - costs many times more than the study itself.

Depending on the stage of the transaction and the investor's perspective, several types of due diligence can be distinguished, including financial, tax, legal, operational and technological due diligence. In practice, financial due diligence is the foundation of the M&A process and often feeds into the valuation model and SPA negotiations.

Buyer due diligence (buy-side)

For a buyer, due diligence is an objective analysis of the financial position of an acquisition target. Financial due diligence is based on historical performance, earnings quality, cost structure, cash position, liabilities (including off-balance sheet liabilities), accounting risks and asset quality. The exact scope depends on the nature of the transaction, the industry and the level of risks identified at the preliminary analysis stage.

Our team provides not only dry documentation of the facts, but more importantly an assessment of their relevance to the transaction: which risks are material, which can be managed, and which could be grounds for renegotiating the price or walking away from the deal.

The results of due diligence feed directly into:

financial model and DCF valuation,
a list of issues to be recorded in the SPA (representations & warranties, indemnities),
analysis of the debt servicing capacity of the acquired entity,
decision on transaction structure.

Support in Market Consolidation (Serial Acquisitions)

We have extensive experience working with clients who systematically consolidate their industries through multiple acquisitions completed within short timeframes. In such cases, we work closely with the client to develop a standardized financial due diligence reporting format that accelerates subsequent projects and enables effective comparison of acquisition targets.

The trust built project by project means that the time from target identification to transaction closing becomes shorter with each successive acquisition.

We also frequently combine the due diligence process with business valuation and financial modelling, providing clients with a complete set of deliverables within a single process.

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Vendor Due Diligence (VDD)

An increasing number of seller-side transactions are preceded by in-house preparation of due diligence documentation - before inviting buyers to the data room. VDD reduces transaction time, strengthens the negotiating position and reduces the risk of surprises that could lead to a lower price or withdrawal of an offer.

We prepare Vendor Due Diligence as a thorough, independent review of a company's financial condition - from the perspective from which buyers will be looking.

Industry and Geographic Reach

We have conducted financial due diligence projects across a broad range of industries, including food and beverage manufacturing, service networks (fitness, beauty, healthcare), IT companies, distribution businesses, and financial institutions.

We execute projects for both domestic and cross-border transactions, with experience in conducting due diligence on companies across the CEE region (including Croatia and Serbia) as well as outside Europe.

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Scope of financial due diligence

The typical scope of financial due diligence is tailored to the nature of the transaction, but typically includes:

analysis of historical financial statements and adjustment for non-recurring items,
verification of normalized EBITDA and free cash flow,
analysis of revenues - by product, channel, customer, with an assessment of their stability and recurrence,
cost analysis and identification of items not reflected in historical results,
analysis of working capital, its seasonality and normalized level,
review of off-balance sheet liabilities and contingent risks,
assessment of asset and liability quality, net debt analysis,
identification of related party transactions and their impact on reported results,
assessment of accounting risks - accounting policies, discretionary areas, quality of closures,
verification of management forecasts and their consistency with historical trends.

FAQ

- Financial due diligence is a detailed analysis of a company's financial situation carried out before a purchase, sale or investment transaction. Its purpose is to identify financial risks and assess the quality of business performance.
- The scope of financial due diligence typically includes an analysis of historical earnings, EBITDA, cash flow, working capital, net debt, asset and liability quality, and an assessment of accounting risks.
- The most common types of due diligence are financial, tax, legal, operational, technological and ESG due diligence. The scope depends on the nature of the transaction and the risk profile.
- Buy-side due diligence is performed by the buyer to assess investment risks. Vendor due diligence (VDD) is prepared by the seller to organize data and reduce the risk of renegotiating the price.
- Due diligence is a good idea to conduct before buying a company, entering an investor, restructuring, consolidating a market or selling a business.
- The duration of due diligence depends on the scale of the business, the quality of the data and the level of complexity of the transaction. Most often the process takes from a few weeks to a few months.