Eight Step Due Diligence Review of the Company’s Finances
By: Jonathan Easton on Apr 26, 2012 06:05:02 AM
This is the second part of a series of articles on conducting due diligence document review. The first part was a general overview of how to do a comprehensive due diligence review. When one corporation intends to acquire another by merger or acquisition, the buyer needs to complete a thorough examination of the target corporation to evaluate its current organizational, financial, and tax position. In short, the buyer needs to know if he is acquiring what was advertised during negotiations. This is especially true when discussing the financial position of the target company. Initial Question From the beginning, it is important to clarify why is the target company willing to sell or merge into the other. During the subsequent due diligence review, you should be able to document whatever answer is given. Eight Step Review of the Financial Documents One of the most important parts of the due diligence review is a close examination of the target company’s financial position. Here are some steps on how to do it: 1. Request all of the financial statements, budgets, list of suppliers, list of customers, and tax records (federal and state) for at least the last five years. 2. Analyze the documents to determine if the company was operating at a surplus or at a loss. If the company was “in the red”, then it must clarified how deep and whether the corporation can be turned to around to operate at a profit. 3. Carefully examine all of the financial documents to gauge how much debt the company is carrying. Record how much money has been borrowed. Are the debts up to date? How much is overdue? 4. It is also important to inquire as to the existence of any outstanding shareholder loans. It must be clarified if they need to paid at the time of purchase. Nevertheless, obtain a copy of the repayment terms. 5. When reviewing the company’s accounts payables, be careful to note any special payment arrangements. 6. A detailed analysis of the accounts receivable is important. Chart how much receivables is at 30 days, 60 days, 90 days and over 90 days. In addition, you need to note if any bad debt was written off and what percentage of the total amounts billed was written off as bad debt. 7. Carefully note whether all federal, state and foreign taxes have been filed. 8. While examining the financial records, it is important to record the business’ assets. Make a list of all of the real property owned or rented with a description of the property and their respective mortgages. In addition, note all of the important personal property owned or leased by the company. Of course, request and review all deeds, leases and mortgages. By no means is this an exhaustive list of how to do due diligence review of a company’s financial documents. The intention is to provide guideline of how a legal document review firm such as Exact Legal Review might proceed when completing a due diligence review.  

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