A short note on the financial due diligence

Due diligence in Singapore is a agenda of critical analysis that companies take on previous to making business decisions in such areas as corporate mergers/acquisitions or major product purchases/sales. The due diligence process, whether outsourced or executed in-house, is in essence an attempt to provide business owners and managers with reliable and complete background information on proposed business deals, whether the deal in question is a proposed acquisition of another company or a partnership with an international distributor, so that they can make informed decisions about whether to go forward with the business action.

“The process involves everything from reading the fine print in corporate legal and financial documents such as equity vesting plans and patents to interviewing customers, corporate officers, and key developers”. The ultimate goal of such activities is to make sure that there are no hidden drawbacks or traps associated with the business activities under consideration.

Many companies undertake the due diligence process with insufficient vigor. In some cases, the prevailing culture views it as a perfunctory exercise to be checked off quickly. In other instances, the outcome of the due diligence procedure may be spoiled by owners, managers, and researchers who stand to benefit personally or professionally from the proposed activity. Businesses should be vigilant against letting such casual or flawed attitudes impact their own processes, for an efficient due diligence process can save companies from making costly mistakes that may have a profound penalty for the firm’s other operational areas and/or its corporate reputation.

Areas of due diligence

The due diligence process is applied in two basic business situations: 1) transactions involving sale and purchase of products or services, and 2) transactions involving mergers, acquisitions, and partnerships of corporate entities. In the former instance, purchase and sales agreements include a series of exhibits that, taken in their entirety, from due diligence of the purchase. These include actual sales contracts, rental contracts, employment contracts, inventory lists, customer lists, and equipment lists. These various “representations” and “warranties” are presented to back up the financial claims of both the buyer and seller.

The significance of this type of due diligence has been finely tuned in recent years with the emergence of the Internet and other transformative technologies. Indeed, due diligence is a vital tool when a company is confronted with major purchasing decisions in the realm of information technology. “A due diligence investigation must answer applicable questions such as whether an application is too bulky to run on the mobile devices the marketing plan calls for or whether customers are right when they complain about a lack of scalability for a high-end system”.

In cases of potential mergers and acquisitions, due diligence is a more comprehensive undertaking. “The track record of past operations and the future prospects of the company are needed to know where the company has been and where it is potential may carry it,” explained William Leonard in Ohio CPA Journal. In addition, observers note that the dramatic increase in information technology (IT) in recent years has complicated the task of due diligence for many companies, especially those engaged in negotiations to buy or merge with another company. Do you want to know more about financial due diligence in Singapore click here?