Due Diligence Reviews
At a fairly early stage, the acquiror needs to obtain sufficient information about the seller’s operations to make a decision whether or not to proceed with the acquisition. Our services support this process.
The Review involves fact gathering and analysis, usually without independent verification, of an acquisition candidate’s financial and accounting records or other information obtained. This acquiror’s management may or may not participate in this Review, and the Review may be performed in one or several stages at various points during the negotiations. The Due Diligence Review provides a broad understanding of all aspects of the company’s business, including:
- Industry information
- Marketing methods
- Manufacturing and distribution methods
- Financial reporting systems and controls
- Industrial relations
- Comprehensive understanding of the company’s financial statements, accounting data and tax posture
- Research and development programs
- Regulatory reporting requirements
- International operations
- Legal matters
Besides obtaining information on the seller, the Due Diligence review may also include a detailed review and analysis of the information obtained. The scope of this part of the Review usually depends on the nature of the transaction and the particular needs of the acquiring company. Usually, however, accounting and tax principles and practices are reviewed in depth, with special emphasis on the problems related to the intended acquisition. The acquiror and its independent accountants must agree at the outset on the scope of this part of the Review, and the acquiror must understand its objectives and limitations.
Because the Due Diligence Review normally generates a great deal of information, management should prepare a checklist of questions for the seller in advance. This will ensure that the buyer gets the right kind of information from the seller. The Checklist can be used as a model for any transaction and then modified for specific transactions.
The Checklist may focus primarily on financial and accounting matters, particularly in the review and analysis phase. Generally, the buyer has focused on nonfinancial or operating matters during its own investigation (e.g., quality of products, reputation with customers, ect.). However, the independent reviewer can be helpful in obtaining this information as well, which explains why the Checklist may contain sections on nonfinancial and operating matters.