Financial evaluation is a process that analyzes a company’s financial data to help identify potential risks and opportunities. It’s used to ensure that a company is being valued fairly and that investors will generate returns.
Financial due diligence is an investigative analysis of the financial performance of a company. Similar to an audit, it is conducted by outsiders looking to gain a better understanding of the financial situation that the company finds itself in, and its prospects for the future. Financial evaluation also sets out to uncover issues that might not be readily apparent in the financial statements.
Buy-side financial due diligence
When we think of it, we’re typically thinking about due diligence from the buy-side perspective.
Indeed, that is the focus of this article and the checklist below. The aim of financial due diligence on the buy-side, as mentioned elsewhere, is to ensure that the target company’s financial situation is as healthy and prospective as you would want it to be as an acquirer.
Sell-side financial due diligence
Despite the tendency to think of financial due diligence as a buy-side practice, there is also a need for the sell-side in a transaction to conduct its own financial due diligence.
This is ostensibly the same work, just conducted from a different perspective. The sell-side should be asking itself: “what would the buy side want to see here?”
It can also serve as a form of internal audit, helping to uncover issues that would otherwise have gone unchecked.
Benefits of financial due diligence:
- Identifying risks and opportunities
It can help identify potential risks and opportunities by analyzing a company’s financial data.
- Validating assumptions
It can help validate the financial, commercial, operational, and strategic assumptions made about a deal.
- Ensuring accuracy
It can help ensure that a company’s reported earnings are accurate, that its financial forecasts are robust, and that its internal controls are intact.
- Measuring a company’s ability to pay debts
It can help measure a company’s ability to pay debts and cover expenses with its cash position.
Steps of financial due diligence include:
- Examining company capitalization
- Analysing revenue and margin trends
- Examining competitors and industries
- Analysing valuation multiples
- Examining management and ownership
- Examining balance sheets
- Examining stock price history
- Examining stock options and dilution
Our Financial Due Diligence Services
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Valuation Report
We help founders with projected valuation reports to help them understand the equity dilution for fundraising.
Strategy Consulting
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Due Diligence
We deliver in-depth audits and reviews of financial records before entering into a proposed transaction with any startup.
Startup Advisory
We work closely with startup founders to make informed partnerships, strategic and investment decisions.
With a track record as the virtual data room of choice in hundreds of M&A transactions, we have been able to put together a template that addresses everything required on both the buy-side and the sell-side.
FAQs:
- What is financial due diligence, and why is it critical in M&A transactions?
It is an in-depth analysis of a company’s financial health, used to assess risks and opportunities. It is crucial in M&A transactions to ensure fair valuation and to uncover any hidden financial issues. - What are the key steps involved in Financial evaluation?
The process includes examining company capitalization, analyzing revenue and margin trends, reviewing balance sheets, assessing management, and evaluating industry competitors and valuation multiples. - How does Financial evaluation differ for buy-side and sell-side transactions?
Buy-side due diligence focuses on verifying the target company’s financial health, while sell-side due diligence prepares the company for sale by addressing potential buyer concerns and ensuring transparency.
