AY 22 - Due Diligence

Question 1

Define due diligence

Answer 1

Comp review and analysis of company’s organization, business, ops and finances hereby one company tries to learn as much about a target company

Question 2

Areas where due diligence is used

Answer 2

Acquisition
JV
Tax transaction

Question 3

3 areas which are usually examined by due diligence team

Answer 3

Financial review
Operational review and analysis
Tax areas of concern

Question 4

Financial review risks

Answer 4

SImilar to an audit - existence/completeness etc

Question 5

Consideration of quality of earnings - cash flow vs net income

Answer 5

closer cash flow is to net income, the higher the quality of earnings

Question 6

Private owner-operated considerations

Answer 6

Take out personal expenses from ops of target company when determining FV as not ongoing expenses

Question 7

Operational review risks

Answer 7

• earnings may not be sustainable
• marketing staff may be laid off
• issues with unionized staff
• production and distribution differences
• owner involvement may be a KSF and owner might leave

Question 8

Tax review risks

Answer 8

Unrecorded liabilities are a risk. New company takes on all liabilities when shares are purchased.