Due diligence is a process of verification and investigation of a potential mergers and acquisitions (M&A) deal or investment opportunity to confirm all relevant facts and financial information, and to verify anything else that was brought up during M&A or investment process. A potential M&A deal involves several types of due diligence, one of the most important one is financial due diligence.

What is financial due diligence

Financial due diligence basically means a detailed investigation and analysis on the overall financial health of the target company that a potential investor carries out before making a decision. Generally, it involves reviews and analysis of:

• the target company’s business and operation mode;
• past 7 years audited accounts;
• past 7 years tax reporting and filing;
• updated management accounts;
• accounting records;
• material contracts;
• ongoing or pending legal proceedings;
• commitments and contingent liabilities that might endanger financial performance or adversely affect the target's financial position after the transaction
• risk of historical tax liabilities and significant potential tax exposures

Why is financial due diligence important

A financial analysis of the target is important as a buyer needs to be assured and understand which risks exist in the target company. It is performed to assist the buyer to achieve the following objectives:

• understanding the historic financial situation of the target company and the correctness of the reported numbers;
• checking that there are no hidden ‘skeletons in the closet’ (i.e. reveal financial risks);
• fully understanding the target firm’s balance sheet (assets and liabilities including contingent liabilities), profit and loss;
• forecast the target's future financial situation
• determining if the expected synergies can be realized
• seeing if any material deal breakers come up
• identifying what guarantees should be requested in the SPA by the buyer
• using the financial due diligence report to achieve bank financing, fine-tune the business plan and prepare the post-acquisition integration plan; and
• using the findings from the financial due diligence to bargain for a better price for the proposed deal.

What LCCPA can do for you?

We have ample experience in performing financial due diligence for our clients on target companies engaging in real estate properties, investment holding, manufacturing, trading  etc.. which are located in Hong Kong and overseas. And on occasions where the target companies are located in overseas, we would work together with our overseas members in the Alliott Global Alliance who are also experts in financial due diligence in their jurisdiction.

In order to assist our clients to achieve their goals, we adopt a tailor-made and strategic fit due diligence approach because each financial due diligent project differs. We seek to meet our clients’ expectations and needs by providing high-quality deliverables that allow for decisions to be made based on reliable fact.

For more information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk .