Due Diligence Tools and Methods

A prospective investor is concerned about the target’s:

1. Quality of earnings




2. Adequacy of working capital




3. Unrecorded or contingent liabilities

We call upon due diligence to analyze these areas and, in a broader context, to understand the business of a company, its risks and prospects.

These objectives define the scope of due diligence and bring about a range of tools, methods and techniques to perform the analysis.

The attached bundle includes forms and templates which I have developed during my years in buy-side private equity and investment advisory.

Many of them are quite cross-functional and can be used in regular reviews of business performance.

They will serve as transaction price adjustments, areas for further investigation, or a negotiation piece in your discussions with sellers.

A few highlights to mention:

• Complex Financial Statement Analysis – DuPont Analysis, Profit Variance Analysis (Bridge Charts), Sources and Uses of Liquidity




• Income Statement Analysis

  
  

  • Overall Sales Analysis (Quality of Earnings Schedule, Like-for-Like Analysis)

  
  

  • Seasonality (creating a cycle plot chart, de-seasonalizing sales and calculating seasonal adjustments)

  
  

  • Product Analysis (Key Portfolio Statistics, Product Profitability Distribution, Profit Variance Analysis by Product, Price-Volume-Mix Analysis, Product Ramp-up)

  
  

  • Customer Analysis (Attrition (Churn) Analysis, Contract Expirations and Pipeline, Customer Concentration)

  
  

  • Employee Analysis (Employee Cost Summary Schedule, Headcount and Salaries, Employee Turnover and Retention, Employee Headcount Statistics)

  
  

  • Budgeting And Forecasting (Assessing Budget Accuracy, Defining Scenarios Based on Historic Volatilities, Building a Trend Forecast, Interim Budgets, Current Forecast Status By Products, Estimating Reasonableness of the Outlook)

  
  
  
  



• Balance Sheet Analysis

  
  

  • Fixed Assets (Fixed Asset Roll Forward, Capex Detalization Schedule)

  
  

  • Inventory (Inventory Structure, Inventory Movements and Balances, Days Inventory Outstanding, Inventory Seasonality, Inventory Aging)

  
  

  • Cash (Cash Conversion Cycle (CCC))

  
  

  • Net Working Capital

  
  

  • Net Debt (Debt and Debt-Like Items)

  
  
  
  

As such, you will find it useful if you are:

• considering a target for potential acquisition




• assisting your client with a potential M&A transaction




• analyzing performance of a company you work for




• trying to understand your business better




• learning how to carry out due diligence

The Excel file is accompanied by a detailed text guide.

Feel free to reach out if you have any questions about any of my products.