A thorough financial analysis of the target company is essential to evaluating a business opportunity. In addition to your internal resources and third-party accountant resources, it helps to have an "extra set of eyes", in the form of expert outsourced resources, assisting with the analysis of the target company's financial information.
Astute Diligence can complement your existing finance and accounting resources and develop information that will be vital to assessing the merits of the deal, negotiating the transaction, obtaining financing, establishing tax and accounting bases of assets, and integrating the acquired entity into the buyer's business. We also help in looking forward by projecting potential profitability over the next several years. Some of the key deliverables we prepare are delineated below.
- Financial Statement Review. We investigate financial statements and look for profitability and areas of concern. We collect necessary background and supplemental information that is needed to verify the facts concerning the financial statements and assess their reliability. We evaluate assets or liabilities that may be unstated, overstated or understated. We evaluate revenue trends, financial ratios and trends in financial ratios. We assess cost structures and operating margins. We also review pro forma financial statements for accuracy and realism.
- Accounting Policies Assessment. We review accounting policies and identify their impact on the business. We conduct tests to ensure that actual practices are consistent with policies. We evaluate the effect of any deviations from GAAP or AICPA standards. We identify business issues surrounding accounting practices, such as the target company's being slow to write down obsolete inventory or recognize bad debt.
- Receivables Assessment. We conduct a thorough review of receivables, including but not limited to the method of recording sales and receivables, use of discounts or rebates, incidence of returns, reliance on installment or consignment sales, disputes, account aging, collateralization of accounts, and existence of uncollectible receivables.
- Inventory Assessment. We interview management regarding inventory, review financial statement accounts of inventory, and review physical counts of the inventory and the inventory records. We evaluate inventory valuations, turns, year-end adjustments, recent trends, and management practices related to inventory. We synthesize our observations into a list of issues that may affect the viability of the transaction or impact negotiations or contractual terms.
- Asset Assessment. We review inventories of assets, including physical assets (such as facilities, production equipment, office and systems equipment) and intangible assets (such as goodwill, capitalized expenses, customer lists, and trademarks). For each tangible asset, we confirm its existence and itemize its value as reported on the financial statements, its estimated market value, and its importance to the business. For all assets, we review methods and schedules for depreciation, amortization and writeoffs and assess their appropriateness and their impact on the business. A complete inventory of issues concerning assets is prepared.
- Payables / Liabilities Assessment. We review fees paid and services provided. We look for questionable transactions. We identify services that will need to be purchased in the future and opportunities for savings. We look for unknown liabilities that can emerge after the transaction is completed, including liability from litigation, non-capitalized leases, employee agreements, purchase contracts, product guarantees, loan guarantees, service guarantees, and self-insurance.
- Budget and Planning Review. We review existing budgets and plans. We compare prior year's budgets to actual results to understand past results. We review current budgets and plans to understand management's current thinking regarding prospects for the business. We also review the formalized policies and procedures governing the budgeting and planning processes.
- Debt and Banking Assessment. We review any outstanding debt instruments, evaluating timing and terms of repayment, collateral, payment history, penalties for default, guarantees, and covenants. If appropriate, we contact the banks or financial institutions to get their opinion regarding the business and its management. We prepare a detailed inventory summarizing all debt, including detailed information concerning the debt and any issues we identify.
- Investment and Cash Management Assessment. We review all investments, along with the decisions and policies that led to the investment. This can cover a broad range of investments, everything from government security or public company stock to unregistered private company equity or loans to executives. For each investment, we determine present value, quality, and liquidity. We also review how well the business collects and utilizes its cash and determine if there are any issues or opportunities for improvement.
- Employee Benefit Funds Assessment. We review pension, profit sharing, 401K, savings and deferred compensation plans. We ensure that fiduciary obligations have been met on an appropriate and timely basis and that the plans are in full compliance with regulatory requirements.
- Taxes Assessment. We identify past, present and future tax obligations and determine that they are being met appropriately. We ascertain detailed status on any tax disputes. We prepare a summary of all activity relating to each taxing authority and inventory any open issues concerning tax obligations.
- Systems and Controls Review. We review the target's financial systems and controls. We review the process and procedures that are designed to protect the integrity of the accounting records and the assets of the business. We assess quality of systems, competence of management, and organizational discipline.