In continuation to my previous article "Financial due diligence as a career", I would like to throw some light at the process of a Generic Buy Side Due Diligence. I observed that not too many resources were available online providing a proper explanation of the DD process. The following process is based on my experience and may vary on a case-to-case basis.
Stage 1: Finalisation of Scope of work
Given that DD is one of the most important stages of the Transaction Lifecycle, it is imperative that the client and the consultant get the scope right. The scope should be exhaustive enough to cover all relevant aspects and precise enough to not waste too much time since a Transaction is extremely time sensitive.
Once the SoW is finalized, the Engagement Letter is signed between the Client and the Consultant, which means a go-ahead to start the execution of the DD.
Stage 2: Kick-off meeting and initial IRL
Once the project team is chosen, there is usually a kick-off meeting/call with the Target management. In this meeting, the Target gives an overview of the business with the Project team. This is one of the most important meetings since the whole process that follows is based on this meeting.
The project team then on the basis of its initial understanding, shares an Information Request List (IRL) with the Target.
Stage 3: Analysis of data provided by the Target and Management meetings
The Target then shares the initial information that was requested in the IRL, this generally includes the Audited Financial Statement, Management Accounts, Organisation structure, Revenue Model and some other generic information.
After working on the initial data, the project team prepares an updated IRL and a Management Q&A list to the Target. This stage involves a detailed analysis of the data provided and a lot of back and forth with respect to the Q&A and IRL.
Since this is the most important and time-taking stage of the whole process, I will post a detailed article on the same in a few days.
Stage 4: Report preparation and Finalisation
Based on the analysis performed by the project team and the answers received from the Target management, a final FDD report is prepared. Generally, a report consists of the following sections:
- Summary of findings/ Executive summary
- Business overview
- Transaction overview
- Quality of earnings
- Quality of net assets
- Quality of cash flow
- Other important sections
The final report is then submitted to the client and is used in adjusting the valuation of the Target and/or renegotiating the deal.
Hope this article was helpful in providing a brief overview of the FDD process. Do write to me in case you require any further specific information.
The author is a Chartered Accountant and a CFA Level 3 candidate, presently working as Lead-Business Advisory with Stratvisors, an advisory firm based out of New Delhi.
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