Due Diligence

In the context of mergers and acquisitions, financial due diligence is a thorough and comprehensive investigation of a target company’s financial health and operational sustainability. Financial due diligence is defined by three core components:

1. Risk assessment – Identifying potential financial, operational, and regulatory vulnerabilities that could impact valuation or deal viability
2. Fact-checking – Verifying the accuracy of financial statements, tax records, and contractual obligations
3. Comprehensive research – Analysing historical performance, market positioning, and future projections to assess true business value”

The documentation required will largely depend on the nature of the business or company being investigated. However, as a general rule the following documents will usually be requested:

• Audited financial statements.
• Tax returns (3-5 years), including records of any tax assessments (such as GST).
• Disclosure of tax liabilities, such as outstanding payments or ongoing disputes.

For some businesses additional documentation may be required. Which can include the following:

• Loan agreements, credit lines, debt schedules.
• Foreign exchange records for international transactions.
• Inventory reports and stock valuation schedules.
• Maintenance records.
• Intellectual property registrations and valuations.

Lease agreements.

Due diligence is normally required during the post-letter of intent (LOI) phase of an M&A transaction, occurring after preliminary negotiations and before finalising the agreement.

The length of the financial due diligence process varies depending on the size, complexity and nature of the deal. The table below provides a general guide on the typical duration of financial due diligence based on the size and complexity of the deal:

These components must be correctly calculated and reported each pay cycle to comply with legal requirements and guarantee employees receive their full entitlements.

A virtual data room (VDR) is an online environment where documents can be securely stored, shared, and reviewed. A VDR serves to ensure the protection of confidential information while allowing relevant parties to simultaneously access documents stored in the VDR. Relevant parties must be assigned permissions to access the VDR.

Following the completion of all relevant due diligence activities, the process advances through to deal term finalisation, purchase agreement negotiation and documentation, and culminates in closing the deal, where funds are exchanged upon condition fulfillment.

Subsequently, the focus transitions to post-acquisition activities, including operational enhancements based on due diligence findings, business integration, and exit strategy planning. Success in each phase is essential for maximising the deserved return on investment while minimising risk.