What a financial director needs to know about due diligence

Due diligence is one of the most important investigatory tools that a business can utilise when it needs to invest, raise business funds, manage buy-ins and buy-outs, form partnerships and during mergers and acquisitions.

When a business is trading actively, the company’s business leaders and finance directors are required to act diligently to protect the company from legal, financial, social and reputation liabilities. They must carefully balance a company’s need to grow while fulfilling its obligations. They must also deal with any arising uncertainty that threatens the financial health of the company. In short, business leaders and finance directors have to shoulder a large number of responsibilities – thankfully, this is where the specialist due diligence team at Blackhawk Intelligence can help.

What is due diligence?

Put simply, due diligence is when one party elects to investigate, verify and confirm details and claims made by another party – often prior to a transaction. This could be before signing a contract, making an investment, initiating the process to raise fund, forming a partnership, or before mergers and acquisitions.

Essentially, the purpose of due diligence is to mitigate risk and ensure that there are no unforeseen liabilities involved in a deal. This generally involves investigating and verifying the other party’s financial performance, assets, contracts, intellectual property, business practices, statutory obligations, to name but a few.

Financial due diligence

At Blackhawk Intelligence, our due diligence team works with finance directors in the UK and abroad, assisting them with examining all financial data and questioning their basis in a cost-effective way. The work includes but is not limited to:

  • Analysis of historical financial performance
  • Future projections
  • Debts and tax obligations
  • Commercial sensitivities

Regardless of the situation, we analyse the data meticulously and our reports deliver clear and honest opinions. This means you can confidently rely on us and our data in your decision-making processes.

Due diligence in mergers and acquisitions

Most businesspeople associate due diligence with mergers and acquisitions and this is because a significant amount of money is usually involved in M&As.

Due diligence plays a vital role in ensuring that the buyer knows what they are getting into before making a transaction. This can be especially true of private market acquisitions or private company mergers as there is less publically available information on private companies – making due diligence absolutely essential in such situations.

While a key part of an M&A transaction involves careful verification and analysis of financial matters, there are also other areas where our due diligence experts can help finance directors to understand the full story surrounding their potential M&A transaction. For example, the status of a company’s intellectual property rights and its technologies can have a massive effect on the value of a transaction. If there are issues in these areas, extensive due diligence can help to identify them before it is too late.

Additionally, due diligence can provide extensive information on any material contracts and the target company’s commitments. This can include customer and supplier contracts, agreements, loans, guaranties, credit arrangements, settlement agreements, equipment leases and so on.

A review of information on matters of litigation, compliance and tax can also unearth potential issues that could become very problematic if identified post-transaction. These are just some of the general areas where due diligence can be of crucial importance in helping to arm financial directors with the right information, allowing them to make well-informed decisions.

Due diligence in business funding

It should not come as a surprise that due diligence can also help to attract investors, as we explain in the article “How can due diligence help you to attract investors?”.

The reason is simple – every investor wants good returns, and companies that invest in due diligence will have a comprehensive report highlighting a full breadth of business issues, from opportunities and risks to compliance. The report gives companies involved a chance to address the issues quickly, thereby gaining competitive advantage and staying ahead.

The consequences of failing to perform due diligence

The importance of due diligence to finance directors cannot be understated. While it is possible to view this approach as ancillary, due diligence really should be an essential part of any business decision that could impact the current and future financial well-being of a company and its shareholders. Failure to perform detailed due diligence can be disastrous.

Throughout history, there have been countless examples of businesses that have failed to perform adequate due diligence (or not at all), leading to severe financial damages. Here are some examples:

The case of the hotel chain Marriott International: Marriott acquired Starwood hotels in 2016. In 2014, Starwood’s IT systems were compromised and customer information was stolen. This issue was unknown to Marriott when it purchased Starwood. In July 2019, Marriott faced a fine of nearly £100 million for breach of the General Data Protection Regulation (GDPR). The case, which is being handled by the UK’s Information Commissioner’s Office (ICO), has explicitly stated that Marriott’s due diligence efforts were not rigorous enough to discover the breach in Starwood’s systems. This indicates just how much importance ICO – a public body under the UK government – places on due diligence efforts.

The case of Hewlett-Packard: Hewlett-Packard acquired Autonomy in 2011 and since then, it had embroiled in a long-running battle that cost HP a great deal of money and negative publicity. It has been reported that HP only performed a minuscule six hours of due diligence before buying Autonomy for an astronomical £8 billion. As a result, HP did not discover fraud that had artificially inflated Autonomy’s value over time.

The due diligence specialists from Blackhawk Intelligence can help finance directors

Due diligence can happen when a company wants to invest, raise funds, form partnership, engage in mergers and acquisitions, as well as managing buy-ins or buy-outs. The due diligence process will help a company’s leaders and its finance directors to control or mitigate risks, as well as identifying opportunities.

While some businesses with vast resources have internal teams to handle due diligence, most businesses approach due diligence specialists like our team at Blackhawk Intelligence to help them navigate the minefield of financial due diligence.

Over the years, Blackhawk Intelligence’s due diligence specialists have worked with countless clients around the world to help them understand the full picture surrounding their transactions – whether pre-transaction or post-transaction.

Our goal is to seek out every bit of information relevant to any transaction to ensure that no stone is left unturned – making sure that finance directors are in the best place possible to make decisions that are in their business interests.

Thanks to our network of human resources around the globe, our due diligence services need not be restricted to just the UK or one country. Our trusted international resources provide us with the local knowledge to help businesses better understand their potential partners on the international stage.

To find out more about how your business could benefit from Blackhawk Intelligence’s due diligence services, get in touch with our London office on +44 (0)20 8108 9317 or use our online form.

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This post was updated on 25/09/2019.

This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.