Page 1

FINANCIAL DUE DILIGENCE

Bankers Manapakkam Study Circle
Presenter : Bhama Krishnamoorthy
Date – 29th August 2017
Time – 5.00 pm to 7.00 pm
 DUE DILIGENCE
•Orderly investigation of complete 360° angle matters pertaining
WHAT to business.

•Serves as a strong legal defense to third-party claims after a

transaction closes. Reduce legal issues by alerting an investor to
WHY potential liabilities that can be mitigated prior to closing the
transaction.

•Simply doing your homework. Before putting funds, make

HOW yourself an expert and investigate to the minutest of details to
avoid a bad investment.

Page 2
 AUDIT VS DUE DILIGENCE
DUE DILIGENCE AUDIT

• Pre Mortem TIMING • Post Mortem

• Facilitation of financial • Statutory reporting & report to

PURPOSE
decision making for investor shareholders

• Transaction focused & detailed REPORT • True & Fair view

• Industry standards & deal scope GOVERNACE • Companies Bill, A/c standards

•Controlled ACCESS • Full

Page 3
 TYPES OF DUE DILIGENCE
Accounting Due Diligence: Financial Due Diligence: Tax Due Diligence: Legal Due Diligence:

• Financial & management • Review of business plan • Current tax position analysis • Assessment of On balance
accounts analysis sheet and off balance sheet
• Business valuation • Tax impact assessment liabilities and potential risks
• Compliance with significant
accounting policies & GAAP • Deal financing for proposed • Historic tax exposure analysis • Mechanics of the proposed
Transaction transaction mechanics and
• Trend analysis of revenue and • Tax saving opportunities execution.
cost • Feasibility analysis and future
prospects • Identification of tax neutral
• Analysis of historical trend and deal structuring options.
Budgets/ forecasts • Quality assessment of FSLI’s

• Analysis of historical and projec

ted capex and liquidity ratios

Page 4
 FINANCIAL DUE DILIGENCE?
•Thorough deep dive analysis of the business plan and also
WHAT historical financial numbers vs forecasts for making a decision on
a particular transaction.

•Avoid unpleasant business performances after acquisition and

WHY also to safeguard from any future legal battles.
•Understand the true value of the assets and liabilities and find
any discrepancies or deliberate book building.
•Benefits in negotiation as it helps facilitating better deal terms

Page 5
OBJECTIVES OF FINANCIAL DUE DILIGENCE
•Investigation of business affairs
•Verify that the transaction complies with investment or acquisition criteria.
•Risk Management
•Opportunity cost assessment of a proposed transaction
•Reduction of post-transaction unpleasant surprises
•Enabler in negotiation and creation of trust between two unrelated
parties
•Facilitation of decision making

Page 6
MERGERS & ACQUISITIONS AND DUE DILIGENCE
• Using different methods, the investor team tries to find an answer to the question :
“Do we or do we not?”
• To answer this question, the team targets predominantly 4 areas which are:
• Business performance – Historic and future
• Authenticity of Financial data
• True worth of current and capital assets and the lien thereon
• Contingent liabilities & Commitments and guarantees given
• Outstanding and potential litigations
• Nowadays, firms develop in-house due diligence expertise for
• Maintaining internal controls.
• Detect any deliberate or erroneous business/ financial activity.
• Put forward a good defense in case of any potential M&A deal.

Page 7
MERGERS & ACQUISITIONS AND DUE DILIGENCE
•Key items to check during due diligence for Mergers & Acquisitions (M&A)
• Trend analysis of company’s financial position for last 3 years
• Is there an independent audit of the company’s financial position?
• Do the FS depict all the current and contingent liabilities?
• Is the business booming or deteriorating?
• Assessment of the authenticity of the operating and capital budgets.
• Historic performance vs Forecast comparison and analysis
• What is the normal liquidity requirement for future continued performance?
• What are the current capital commitments and what capex is required for
growing business?
• Condition of assets and liens thereon.
• Is the depreciation on the capital assets provided for correctly?
• Aging of the accounts receivable and potential bad debts discovery
• Is the EBIDTA and any adjustments properly accounted?
Page 8
 PROCESS – PRE
• Scope and timelines agreement with client
• Analysis of preliminary information like MoA, incorporation certificates, ownership
structure etc.
• Understand the micro and macro elements affecting the business of the potential
investment – Industry research
• Assessment of the historic business performance and its authenticity
• Co-relate the forecasts with the historic performance and market information
• Liaison with management to validate findings

Page 9
 PROCESS – POST
•Discussion with client about key findings and future implications
• Issuance of final report
• Structure of final report
• Executive Summary: Draws investor’s attention
• Key positives and negatives
• Main Body: Work done and inferences
• Appendices: Detailed documentation for the work done.

Page 10
CASE STUDY

Page 11
 COMMON ISSUES SEEN
• Application of Accounting Standards
• Eg 1 : Company recognizes income on cash basis instead of accrual
• Eg 2 : Difference in AS as applicable for investor vs target company
• Contingent Liabilities
• Eg 1 : Insufficient payment of employee insurance/ social security contribution
• Eg 2 : Possible litigation risks due to breach of laws relating to target company
• Related party transactions
• Eg 1 : Providing off balance sheet guarantees to its affiliated firms for the interests of
the company rather than for its business objectives
• Income Tax
• According to over-statement/ under-statement of profit, the income tax payments
needs to be accordingly revisited.

Page 12
 DUE DILIGENCE DISASTERS
CORPORATES YEAR & VALUE GOAL OVERSIGHT LOSS

1998 - $40B Join forces & create Competitive analysis $34B

automotive giant

2012 - $11.1B HP to move from Inaccurate FS & cash $5B

computer hardware flow analysis
to software

1994 - $1.7B Quaker wanted to Intellectual property & $1.4B

enjoy similar success competitive
of acquisition of analysis
Gatorade
1994 - £800M BMW intended Inaccurate info on £790M
diversification & sales & cultural clash
increase sales
Page 13
 DUE DILIGENCE SUCCESSES
CORPORATES YEAR & VALUE GOAL IMPACT

2006 - $7.4B Acquiring Pixar’s Successful movies - Toy Story3,

computer graphics Up, Wall E, Ratatouille whose
Technology combined revenue is $3.5B

1999 - $81B Create world’s biggest Remains strongest leader in oil

oil company & cost market. In 2008, bagged all 10
Rationalization spots in “Top 10 Corporate
Quarterly earnings”

Pre merger, neither Q4 2009 reported profit for first

2008 - $13B had an annual profit, time, has 30m subscribers as on
goal to eliminate Q1’16 and has/ had celebrity
duplicated program Shows hosted by Jim Parsons,
costs Oprah Winfrey, Martha Stewart
Page 14
On a lighter note…. (Joke, Joke!)

Page 15
THANK YOU!

Page 16