Whenever a big decision is about to be taken for a business, the right financial reviews should happen. That’s the time to conduct financial due diligence (FDD for short). It’s not just your average financial review, because it can make the difference between profit and unnecessary mistakes! So, let’s check out why you need it, and how it can help your business and potential investors.
TL;DR - Why FDD Matters
- Highlights potential risks
- Prevents overvaluation of a business
- Finds hidden liabilities that might slip through the cracks
- Validates financial claims
- Makes a company trustworthy in the eyes of stakeholders and investors
What Is Financial Due Diligence?
As we already mentioned, financial due diligence is an investigative review. Its main job is to assess a company’s financial health. This is especially crucial before a big transaction like mergers, investments, etc… Financial due diligence is all about reviewing the company’s financial history, its current status, as well as future predictions. This all helps with risk assessment and correctly valuing a business.
5 Reasons You Need to Conduct Financial Due Diligence
- Risk Management: FDDs assess the sustainability of a business. In other words, they check whether the revenues are stable and not risky by relying on just one client or one source of revenue.
- Avoid Overpaying: A financial due diligence ensures a fair valuation of a business. In other words, it ensures that the asking price of a company reflects its real value after the valuation.
- Find Hidden Liabilities: A thorough review like an FDD can find liabilities that slipped through the balance sheet cracks. Moreover, it can uncover tax issues, debts, as well as pending lawsuits. These liabilities, if left unchecked, can harm the value of a deal.
- Validate Historical Financial Data: If a business is about to get sold, the buyers need to check that all their revenues, expenses, and cash flow are recorded accurately. FDDs can check for any inconsistencies in those financial statements.
- Gain Investor Confidence: Finally, when all the financial data of a business is clear and concise, this will make it look trustworthy. When a company gains the confidence of potential investors or stakeholders, this can make the negotiations and sales faster.
When Do You Need FDDs?
- Before a sale or a merger
- When considering an investment in a startup or a new market expansion
- In case of a new partnership
- Before company restructuring
Noraal Can Help with Financial Due Diligence & More!
At Noraal, our experienced accountants and consultants are ready to conduct FDD for your business. Our team is also here to provide a vast range of financial services to keep you on your A-game in other aspects! Whether you need business valuation, cash flow services, and corporate tax reviews, we got you. Make sure you contact us today for a consultation, and you won’t ever have to look back. So, ready to take your business to the next level?