Due Dilligence

Question 1

What is due diligence?

Answer 1

comprehensive review and analysis of a company’s organization, business, operations and finances, whereby one company tries to learn as much as possible about a target company

Question 2

What are the steps in a due diligence engagement

Answer 2

1. Understand the nature of engagement, types of reports issues and other restrictions
2. Perform overall Risk assessment
3. Consider overall strategy for the engagement based on the risks
4. Report on procedures performed and factual results

Question 3

Target Areas typically examined by due diligence

Answer 3

Financial review

operational review
Tax areas of concern

Question 4

What’s in a Financial Review

Answer 4

FS risks specific to the target company

Need to consider the quality of earnings of the target company - variance between cashflow and NI

normalize owner ‘s personal expenses included in operations of company when determinign the FV

Question 5

What’s in an operational review

Answer 5

Focus on the financial health of the target company to determine its value

Identify synergies or issues in business not tied to FS

helps acquirer understand the industry and operations of the company

Question 6

What’s in a tax review

Answer 6

perform specific procedures around tax-related risks.

Have prev. tax filing been completed

Loss carryforwards may not be available or insufficient

value used to transfer the assets are inadequate for tax purposes