Glossary
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Financial Due diligence

What is Financial Due Diligence? 

Financial Due Diligence (FDD) is an investigative analysis of the financial performance of a company. It is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information and to verify anything else that was brought up during an M&A deal or investment process. 

FDD is completed before a deal closes to provide the buyer with an assurance of the accuracy of reported earnings, the robustness of financial forecasts, and the integrity of internal controls.

Scope of FDD Analysis

The scope of conducting FDD analysis differs based on the industry, scale of business, and size of the company. However, the analysis typically covers the following areas:

Financial statements analysis: This involves analyzing the company's historical financial statements to identify any trends or anomalies in the financial data. It also involves reviewing the company's accounting policies and practices to ensure they are in compliance with accounting standards.

Working capital analysis: This involves analyzing the company's working capital to determine its liquidity and ability to meet short-term obligations.

Tax analysis: This involves reviewing the company's tax returns and tax-related documents to identify any potential tax liabilities or issues.

Legal analysis: This involves reviewing the company's legal documents, such as contracts, agreements, and litigation documents, to identify any potential legal liabilities.

Management analysis: This involves analyzing the company's management team and their ability to manage the company's financial affairs effectively.

In conclusion, financial due diligence is a critical process that helps buyers, investors, and lenders to make informed decisions by providing them with a clear understanding of the target company's financial health, potential for growth, and any potential liabilities. The scope of the analysis varies based on the industry, scale of business, and size of the company.