Financial Due Diligence

Financial due diligence is one of the procedures carried out in intercompany investment transactions or in companies’ credit drawing processes. Financial due diligence, which includes the determination of companies’ debts, assets, equity, share values and market shares, is of great importance in terms of securing investments. The financial due diligence requested by the buyer company, seller company or the financial institution that will lend the loan is carried out by independent consulting companies. The data obtained as a result of the due diligence process is presented to the parties in an objective and detailed manner. In this way, it becomes possible to complete the investment and loan processes in the safest way possible.

What is Financial Due Diligence?

The term “financial status” refers to the set of data obtained by evaluating the positive and negative values of companies together and collectively. The financial status of companies is of great importance in terms of the actions they will take in the market. The process of revealing the financial situation, which is effective in most of the transactions such as receiving investors, making investments and obtaining loans, in an impartial, objective and complete manner is called “financial due diligence”

Financial due diligence is used to ensure transparent and reliable completion of acquisitions, mergers, investments and loan transactions carried out by companies in cooperation with other companies and financial institutions. The financial due diligence report, which is prepared by analyzing the financial status of the companies in detail, enables the parties involved in subsidiaries to obtain detailed information about the other company and provides information about the risk analysis of the planned cooperation.

In which cases is financial due diligence performed?

Financial due diligence is carried out by independent consulting firms in cases such as a company investing in another company, a financial institution receiving a loan application from a company, and merger and partnership projects between companies. Financial due diligence, which enables companies to access detailed information about the counterparty, can be prepared for both parties of the planned joint venture.

In the financial due diligence prepared for the buyer or investor company, the entire financial assets of the company to be acquired or invested in are examined in detail. The company’s income and expenditure balance, real estate, assets with financial value and share values are determined in the form of objective data. At the same time, the debts and other financial obligations of the company in question are also examined. The financial due diligence is completed by analyzing the positive and negative data about the company together. The result is evaluated by the buyer company and it is decided whether to purchase or invest in the company under review.

Financial due diligence for seller companies is mainly requested in cases where there is more than one prospective customer. Companies planning to make a sale may request the financial due diligence of potential customers in order to identify the company that will make the best offer. Again, in these transactions carried out by independent consultants, all financial values of the buyer company are analyzed and the added value that the company to be sold will add to the buyer company is determined. This data is used to determine the best price for the company to be sold.

Financial institutions may also frequently request financial due diligence on companies applying for loans. In these analyzes, data such as the company’s assets, real estate, income and expenditure balance are examined to determine whether the company is a suitable candidate for a loan. The financial due diligence clarifies the potential of the company applying for the loan to realize the project that is subject to the loan and, accordingly, to repay the loan without any problems. While responding to applications positively or negatively, financial institutions consider the data obtained in the financial due diligence to a great extent.

What are the Advantages of Financial Due Diligence?

Financial due diligence is of great importance as it makes any commercial endeavor in which different companies and organizations plan to act together transparent for all stakeholders. Companies that conduct financial due diligence when acquiring another company or investing in the work of that company can see the data they will encounter in advance. Financial due diligence, which determines the risks of planned acquisitions, mergers, investments and partnership projects, helps companies understand which steps they can take and which results they can achieve.

Financial institutions that conduct financial due diligence to open loans can also get to know the companies that apply to them more closely. Financial due diligence, which reveals how efficiently the company can use the loan and how it can repay it, helps financial institutions to lend safely. Financial due diligence is also useful for the effective distribution of loans.  Financial due diligence, which is effective in enabling financial institutions to identify the company that promises the highest potential and to extend credit to that company, makes significant contributions to the development of the world economy.

How to Conduct Financial Due Diligence?

Companies that want to conduct financial due diligence should first apply to expert and impartial consulting companies that have the experience and equipment to carry out this process. Consulting companies collect all the data about the company to be investigated and objectively report all the potential of the company. Financial advisors evaluate the company’s revenues, growth rate, assets, expenses and debts together, and reveal the company’s strengths and risks through financial due diligence.

Financial due diligence also enables companies to be evaluated in terms of transparency and reliability. Companies that can be evaluated and analyzed by independent organizations without any problems stand out as reliable companies for buyers, investors, potential partners and financial institutions. The ability to analyze all of the company’s data provides important data to other stakeholders by proving that company management complies with international standards. If the data presented as a result of the financial due diligence is positive, the acquisition, partnership, investment and loan processes can be concluded positively.