Due Diligence Tools and Methods

Description
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 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.