The FDD report summarizes the findings of the FDD process in an objective manner. It should provide recommendations to improve the business performance of the targeted company in light of the issues discovered during the investigation. A summary of the analysis should also be included in the report.
Audit vs Financial Due Diligence
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The FDD is not a financial audit. Based on historical financial statements, a financial audit assesses a company’s current financial position. The purpose of financial due diligence is to determine whether historical and forecasted trends are relevant to the prospective buyer, as well as to validate their validity.
As part of the acquisition process, the acquirer conducts financial due diligence on the target company to determine its financial health. A company’s financial statements are assured by an audit, however.
The following are some other key differences between FDD and audit.
| Financial Due Diligence | Audit |
| Vendor-defined scope and procedure | governed by country-specific rules and regulations |
| No verification is conducted of the accuracy of the information provided | . The accuracy of the information is verified |
| Takes into account future projections | mainly based on historical data |
| Analyzes earnings quality | and balance sheet |
Financial Due Diligence Limitations
There are a few limitations to FDD. This is not the same as an audit conducted according to generally accepted auditing standards. Neither does it guarantee future performance nor can it replace independent audits.
The lack of access to financial data makes FDD unsuitable for small businesses. It is difficult for small businesses to gather accurate financial data because they use their own accounting software.
You should also know about due diligence company checklist.
Is there a way for my firm to simplify Financial Due Diligence?
When the acquirer conducts a comprehensive FDD exercise, he or she will be able to make an informed decision regarding the acquisition. Moreover, it assists the vendor and purchaser in resolving issues and executing a successful deal.
During the Financial DD process, you can use a variety of applications. You can, however, analyze all the details of the company’s financial history and performance on a single screen with an all-in-one application, like SignalX. Moreover, you can use the source documents to conduct more detailed, in-depth studies on the target company. You should have all the bases covered, for moving forward with your new deal, when you pair this with a well-rounded legal and reputational Due Diligence.
Frequently Asked Questions
Financial due diligence is performed by whom?
In most cases, the acquirer’s in-house team performs the FDD. FDD can also be outsourced to an external due diligence firm.
What is the cost of financial due diligence?
The cost of financial due diligence varies from organization to organization. Amounts vary depending on the size of the target company, the complexity of the deal, and the number of parties involved.
Before completing a merger agreement, does financial due diligence have to be performed?
The signing of a definitive merger agreement requires financial due diligence.
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