Finance Due Diligence Report - Investment Friend

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Finance Due Diligence Report A Finance Due Diligence (FDD) report is a comprehensive investigation and analysis of a company’s financial health, performance, and future prospects. It is typically commissioned by a potential buyer (investor or acquiring company) to gain a thorough understanding of the target company before making a significant investment or acquisition. The purpose is to validate the information provided by the seller, identify any potential risks or opportunities, and inform the buyer’s decision-making process, valuation, and negotiation strategy. The report usually covers several key areas, providing a holistic view of the target’s financial situation. **Financial Statement Analysis:** This is a fundamental aspect, involving scrutiny of historical financial statements (balance sheets, income statements, and cash flow statements) usually spanning the past 3-5 years. The aim is to identify trends, anomalies, and potential red flags. Key financial ratios and metrics are calculated and benchmarked against industry peers to assess profitability, liquidity, solvency, and efficiency. **Earnings Quality:** An important aspect of FDD is assessing the quality of earnings. This involves examining the sustainability and reliability of the target’s revenue streams and profit margins. Analysis includes exploring accounting policies, revenue recognition practices, one-time gains or losses, and related party transactions to determine if earnings are artificially inflated or unsustainable. **Net Working Capital:** This focuses on the target’s ability to manage its short-term assets and liabilities effectively. The report analyzes accounts receivable (days sales outstanding), inventory (days inventory outstanding), and accounts payable (days payable outstanding) to determine whether the target company efficiently manages its cash conversion cycle. The adequacy of working capital to support ongoing operations and future growth is also assessed. **Debt and Liabilities:** The report meticulously reviews the target’s debt structure, including the terms, conditions, and covenants of outstanding loans. Contingent liabilities, such as potential litigation or environmental claims, are also investigated to determine their potential impact on the target’s financial position. This analysis informs the buyer of potential future financial obligations. **Tax Compliance:** Assessing the target’s compliance with tax laws and regulations is crucial. The report examines tax returns, tax audits, and transfer pricing policies to identify any potential tax liabilities or exposures. **Key Performance Indicators (KPIs):** FDD goes beyond pure financial statement analysis, assessing key operational KPIs relevant to the target’s industry. These might include customer acquisition cost, churn rate, sales per employee, or production efficiency. The trends and drivers of these KPIs are analyzed to assess the target’s operational effectiveness. **Forecast Review:** If the target company provides financial forecasts, the FDD report will evaluate the reasonableness and achievability of these projections. This includes assessing the underlying assumptions, historical accuracy of forecasts, and sensitivity to key business drivers. The final FDD report concludes with a summary of key findings, identified risks and opportunities, and recommendations for the buyer. The report may also propose adjustments to the purchase price or deal structure based on the findings. Ultimately, the finance due diligence report arms the buyer with the information needed to make an informed decision and negotiate the transaction on favorable terms, mitigating potential risks and maximizing the value of the investment.