Contributed by Bestar Services
24 June, 2020
Any organisation considering a deal needs to check all the assumptions it is making about that deal. Timely and properly planned due diligence reviews are critical to any successful investment.
Thorough due diligence is critical, including assessing risk and compliance issues, conducting tax and financial planning, determining cash flows, and identifying hidden costs.
A structured due diligence process can also help management assess the likelihood of the success of, and limit surprises during, the post-transaction period.
Due diligence process may yield information about matters such as non-recurring items, tax exposures, benefit payouts, or other financial obligations, that individually or cumulatively can provide the buyer with an opportunity to renegotiate fundamentals such as the purchase price and potential escrows or holdbacks. In the event renegotiation is not feasible or successful, the buyer will be faced with better information to decide as to whether to proceed with the transaction at the original price. Thorough due diligence will not per se make a transaction successful; however, it can help expose and mitigate a number of the potential threats and risks to a successful transaction and lead to better-informed pricing, valuation or necessary adjustments.
How Bestar can help
The concept of our financial due diligence process is a detailed and systematic analysis of data from the target company in order to obtain an overall picture of the company in connection with the corporate deal.
We can support you in the analysis and assessment of available information in order for you to make an informed decision.
We assist the buyer or relevant party to perform full scope or limited scope specialised due diligence services to identify the critical issues for the transaction to a wide range of corporate and private equity clients.
Our work may relate to an acquisition of the shares in a company or its assets (or a group of assets) as well as the organised part of the enterprise. Our methodologies are geared to deliver within a standard transaction time lines of 2 to 6 weeks.
Our reviews add value by presenting relevant facts, and by focusing on key financial and regulatory issues likely to impact the acquisiton structure, or post-acquisition operations.
Due diligence is a broad concept that can cover a significant number of areas. We conduct due diligence in the following areas to help you mitigate risks.
- Financial due diligence
- Tax due diligence
- Human resources due diligence
- IT and cyber due diligence
- Reputational due diligence
- Legal due diligence
- Environmental due diligence
Financial due diligence
Financial due diligence helps you ensure that the financial information of the target business reflects the reality.
Bestar financial due diligence specialists help challenge assumptions about future performance. Financial due diligence analyses and validates all the financial, commercial, operational and strategic assumptions being made. It uses past trading experience to form a view of the future.
It generally includes a detailed analysis of audited financial statements, monthly or quarterly historical / sustainable / forecast financial performance, financial position, indebtedness, reported or unrecorded contingencies, working capital, fixed assets, quality of the financial information, key financial terms of existing contracts, reading of the audit work papers, analysis of the details supporting publicly available financial information, as well as interviews with financial management and the external auditors.
This process can yield significant observations on the target's earnings (such as non-recurring or one-time activities), and insights into post-transaction needs for net working capital, and can shed light on debt-like exposures and trends in operating results and capital expenditures, among other areas.
Financial due diligence involves an investigative analysis of a business, assessing the key issues facing the business and cash flows, and the drivers behind maintainable profits and cash flows.
Our approach includes analysis of:
- Actual sustainable earnings and identification of one-off events
- Financial projections and likelihood of achieving projections
- Cash flow generators and seasonality in results and financing
- Capital expenditure
- Working capital
- Commitments and contingent liabilities that might endanger financial performance or otherwise adversely affect the target's financial position after the transaction.
- Organization, important processes, products, clients and suppliers
- Financial performance and trends, by segment and/or country
- Financial position and working capital developments
- Forecasts, opportunities and risks
- Real estate situation
Tax due diligence
The aim of the tax due diligence is the analysis of the target's tax treatment in respect of its consistency with Singapore tax regulations. Tax due diligence provides a deep dive into the target's tax profile - including both potential tax exposures and available tax attributes (net operating losses, credits, etc.) - by analyzing tax returns, financial statements and supporting information, as well as conducting interviews with tax management and advisors. Tax due diligence typically focuses on both Singapore (and, if relevant, non-Singapore) income and non-income tax areas, including sales, property, and transfer tax items. It also can provide insights into the post-acquisition depreciable/amortizable tax basis that will likely help the acquirer to estimate future tax liabilities, and is often a valuable exercise in terms of identifying structuring opportunities for the transaction.
Human resources due diligence
Human resources due diligence typically includes a detailed review of the company's relationships with its employees, such as union agreements, regular benefits, executive compensation, and post-employment obligations. In addition to flushing out exposures, it can help identify cost structure changes that can occur if the target's employees join the buyer's benefit plans post-acquisition.
Our team can conduct a due diligence on the HR organization, demographic characteristics, remuneration systems and benefits, talent and recruitment, job vacancies, and assess the complexity of personnel integration.
IT due diligence
Our team can conduct an IT due diligence on management information system and control environment, IT systems, the IT cost structure, the stability and age of systems, current IT projects, and assess the complexity of a carve-out or integration of systems.
Legal due diligence
Legal due diligence looks at potential legal structures, exposures and risks, usually including a review of key commercial agreements, IP, and contracts. Counsel's involvement in overall legal due diligence is crucial in the negotiation and drafting of the acquisition agreement, transition services agreements, and need for indemnities, escrows, and post-acquisition true-up mechanisms (e.g., net working capital/net debt adjustment clauses).
Reputational due diligence
Reputational due diligence can include background checks on the target, its shareholders and key executives. Prior instances of fraud, corruption, money laundering, trade compliance, labor, and product safety or other adverse issues can be identified through focused integrity due diligence research. Public records can also reveal financial red flags such as bankruptcies, liens, and excessive litigation for the company and/or its principals.
Environmental due diligence
Environmental due diligence is the other common workstream in a typical due diligence approach and focus on exposure in this area, as well as potential changes in run rate costs post-acquisition.
If you have any questions in relation to the above, for the best advice contact Bestar.
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