What This Guide Covers
- End-to-end framework for conducting financial due diligence in M&A transactions
- Key focus areas: quality of earnings (EBITDA), working capital, net debt, capital expenditure
- Revenue analysis with price-volume bridges and underlying driver analysis
- Practical guidance on normalisation adjustments and deal implications
What is Financial Due Diligence?
Financial due diligence is a detailed analysis of the target’s historical performance with core focus on key financial drivers including the quality of operating revenue and earnings (generally EBITDA), capital expenditures, operating working capital, and net debt/debt-like items. Trends in these metrics are analysed to obtain perspective on business performance, financial position, capex requirements, and working capital dynamics.
KCM’s Due Diligence Methodology
KCM’s methodology focuses on the key deal rationale, including application of accounting principles, management reporting systems and internal controls, quality of sustainable earnings, normalised working capital, adjusted net debt, commercial terms with key customers and suppliers, nature of capital expenditure, analysis of historical and projected cash flows, and identifying and validating tax efficiencies and exposures.
Key Benefits
A thorough due diligence exercise provides early identification of potential deal issues, focus on sustainability of earnings through extensive management discussions, key inputs on net debt and normalised working capital that directly impact valuation, factual confirmation to avoid unpleasant surprises, constructive feedback on accounting policies and internal controls, and key inputs for effective transaction closure.