Financial Due Diligence in Pali

What Is Financial Due Diligence?

Financial due diligence is a review of a business's financial information to help a buyer, investor or lender understand whether the numbers they are relying on are reliable and what they really mean. The aim is to answer practical questions: what are the true, sustainable earnings; how much working capital does the business need; what debt and debt-like obligations come with it; how well does profit convert into cash; and are the forecasts reasonable.

The review goes beyond the face of the audited financial statements. It looks at accounting policies and whether they are applied consistently, revenue recognition, one-off or non-recurring items, related-party transactions, customer and supplier concentration, capital expenditure needs, contingent liabilities, off-balance-sheet items and the quality of the accounting records. The output is usually an adjusted view of earnings, a normalised level of working capital and a schedule of net debt and debt-like items, which feed into price and deal terms.

Financial due diligence is one workstream in a wider due diligence exercise, alongside tax, legal, commercial and regulatory work. Due diligence is an investigation of facts on the basis of documents and information provided, within an agreed scope. It is not a valuation, not an audit and not a formal legal, tax or accounting opinion, and it cannot detect what is not disclosed. It is different from an audit, which is an assurance engagement under auditing standards.

Who Needs Financial Due Diligence?

• Buyers and investors considering an acquisition or investment
• Lenders assessing the financial reliability of a borrower
• Promoters preparing for a sale or fundraising (vendor due diligence)
• Joint venture partners reviewing each other's numbers
• Private equity and venture investors in later-stage rounds
• Companies planning a merger or restructuring
• Boards seeking independent assurance on key numbers

When Is Financial Due Diligence Required?

It is not generally a legal requirement, but it is expected when:

• A significant investment or acquisition is being negotiated
• The price depends on earnings multiples
• The target's records are informal or have not been audited carefully
• A lender or investor asks for independent financial review
• Working capital or net debt adjustments will be built into the deal
• The business has related-party dealings or concentrated customers
• The promoter wants to find and fix issues before the buyer does

What Our Financial Due Diligence Includes

The scope is agreed with the client and typically covers:

• Understanding the transaction, business model and key concerns
• Request list and data room review
• Analysis of historical income statements, balance sheets and cash flows
• Quality of earnings: normalisation for one-off and non-recurring items
• Revenue recognition, customer and product analysis
• Cost structure, margins and trends
• Working capital analysis: seasonality, normal level and cash conversion
• Net debt and debt-like items: loans, guarantees, deferred payments, provisions, pending liabilities
• Capital expenditure and fixed asset review
• Related-party transactions and balances
• Contingent liabilities and commitments
• Review of projections for reasonableness and consistency with history
• Findings report with quantified impact on earnings, net debt and working capital, and points for price and agreement terms

Legal and Practical Considerations

Not an audit. Financial due diligence is based on the information provided and agreed procedures, and does not provide the assurance of an audit under the Standards on Auditing. Procedures are chosen to answer the transaction's questions, not to express an opinion on the financial statements.

Accounting framework. Companies prepare financial statements under the Companies Act, 2013 and the applicable accounting standards, either Ind AS or the Accounting Standards, depending on the company. Differences in policies and the consistency of their application affect comparability.

Scope and period. The review covers the agreed periods, usually the last three years and the current year to date, and a locked-box or completion accounts mechanism may be used to deal with changes after the reference date.

Findings feed into the agreement. Quantified adjustments to earnings, net debt and working capital typically feed into price, price adjustments, warranties and indemnities, which are negotiated in the transaction documents.

Related work. Tax, legal, commercial and regulatory aspects are covered by separate due diligence workstreams, and overlap should be coordinated.

Valuation separate. Due diligence findings inform valuation but are not a valuation.

Confidentiality. Data room information is confidential and should be covered by a non-disclosure agreement.

Common Findings in Financial Due Diligence

• Reported profit includes one-off gains or excludes recurring costs
• Revenue recognised early or inconsistent with contracts
• Working capital below normal at the reference date
• Debt-like items not on the balance sheet, such as deferred consideration or overdue statutory dues
• Related-party transactions not at arm's length
• Customer concentration or reliance on a few contracts
• Capex deferred to inflate cash flow
• Projections inconsistent with historical trends

Professional Fees, Government Fees and Timeline

Due diligence carries no government fee. Fees of external accounting professionals, if engaged for specific procedures, are separate. Our professional fees depend on the size and complexity of the business, number of entities and periods, quality of records and the speed needed. A review typically takes 10 to 20 working days after the data room is available.

Financial Due Diligence vs Tax Due Diligence vs Commercial Due Diligence

Financial due diligence examines earnings quality, working capital, net debt and cash flow. Tax due diligence examines tax compliance and exposures. Commercial due diligence examines the market, customers and the business plan. Related services include Tax Due Diligence, Commercial Due Diligence and Transaction Due Diligence.

Need Professional Assistance With Financial Due Diligence?

Understanding the real numbers before you commit capital can protect the price you pay. The Legal Bank can help you structure and carry out a financial due diligence review. Share your requirement to discuss the next steps.