FINANCIAL DUE DILIGENSE SERVICES

Transcription

1 FINANCIAL DUE DILIGENSE SERVICES

2 2 BDO Kazakhstan OVERVIEW failed transaction or ill-researched business venture can be a costly scenario on many levels. Generally, Adue diligence refers to the care a reasonable person/organization should take to obtain all the material facts before entering into an agreement or transaction with another party. Due diligence helps buyers, seller, or investors make sure that there are no unexpected problems with an asset or investment and helps ensure they maximizes their position in a transaction. Due diligence can be a complex and formalized process, and it spans investigations into all relevant aspects of the past, present, and predictable future of the business of a target company. This usually includes reviewing all financial records plus anything else deemed material to the sale. Why do Parties Conduct Due Diligence? There are many reasons for conducting due diligence, including the following: Confirmation that the business is what it appears to be Assess the target s earnings and cash-flow quality Identify potential deal killer defects in the target and avoid a bad business transaction Gain information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions Verification that the transaction complies with investment or acquisition criteria Assess the level of ongoing working capital required for the target business

3 BDO Kazakhstan 3 Identify internal control weaknesses of systems and personnel Provide additional insights on the target s financial projection analyses Assist with review of the purchase agreement and much more This is especially true in emerging markets where business intelligence can be difficult to come by and compliance frameworks are undeveloped. What are the Types of Due Diligence Services? Due diligence can be limited or an exhaustive, depending on the client s mandate and the nature of the transaction. There are a number of types of due diligence that can be performed when evaluating a transaction. These include: Legal - aims to ensure that there are no legal impediments to buying a business Financial - aims to verify the factual accuracy of claims made by the sellers Commercial - looks to understand the market the target business is operating in Operational - aims to determine the effectiveness of operations of an enterprise in relation to the business plan Tax - aims to ensure that there are no historical tax liabilities that have materialized due to mistakes or deception that the acquirer will become liable for IT - aims to identify any IT issues in the target business HR - considers the impact of human capital on the proposed deal Although these have traditionally been distinct, the best due diligence maintains a close connection between them, since information in one area can often impact the checks being carried out elsewhere. In general, Financial Due Diligence involves a review of: historical financial results current financial position forecast financial results working capital requirements employee entitlements provisions valuation implications risks and opportunities Who Benefits from Due Diligence Services? Most transactions requiring financial due diligence services can be broken down based on the type of client being represented (buyer/investor vs seller). Investors and Acquirers The buy side process is generally comprised of the following four phases: PHASE I: Target identification and engagement. PHASE II: Preliminary due diligence, valuation, and indication of interest. PHASE III: Further due diligence and letter of intent. Final due diligence, negotiations, drafting of the definitive purchase agreement, and completion of the transaction. The due diligence process is no light undertaking, and it can play a vital role throughout each stage of the buy-side process. Outlining strategic goals for the due diligence process is key and will lead to better outcomes for the purchaser/investor. Additionally, enlisting the services of experienced due diligence professionals can help substantially ensure that this step of the buy-side process is thorough and moves smoothly.

4 4 BDO Kazakhstan Sellers/ Divestitures Sell-side due diligence, sometimes referred to as reverse or vendor due diligence, requires a seller to take a critical, introspective look at their own financial position and assess the opportunities and risks facing their company prior to sale. The focal points of sell-side due diligence mirror the typical objectives deployed by a buyer/investor performing buy-side due diligence. The sell side process is generally comprised of the following five phases: PHASE I: Evaluation of options. PHASE II: Disposal planning & preparation. PHASE III: Competitive auction. PHASE IV: Exclusivity & completion. PHASE V: Post-sale actions. Typically, these objectives revolve around analyzing the quality of the company s historical earnings, the reasonableness of forecast assumptions, assessing working capital requirements, identifying tax risks, and understanding the company s customer, vendor and other key relationships. However, unlike buy-side due diligence, which is often conducted more significantly closer to closing, the sellside due diligence is usually commissioned early in the sale process. The transaction advisory or due diligence practice of a public accounting firm is often sought to assist management with the analysis and preparation of a sell-side report. Sellers also can perform a due diligence analysis on the buyer. Items that may be considered include the buyer s ability to purchase as well as other items that would affect the purchased entity or the seller after the sale has been completed.

5 BDO Kazakhstan 5 METHODOLOGY What is Our Approach to Financial Due Diligence Services? Financial Due Diligence takes place to various degrees throughout the entire process. The extend is significantly dependent on the nature of the transaction, the type of business, the size of the transaction, the likelihood of closing, the tolerance for risk, existing time constraints, cost factors, resource availability, and the client. During the due diligence process, issues are likely to arise concerning things such as operations, customer concentrations, or projections, and the parties are expected to provide valid, plausible responses. The parties conducting due diligence generally create a checklist of needed information. Below is the general framework for our financial due diligence services. General Procedures of Financial Due Diligence include: Meet with management of entity being sold to understand the business and rationale for sale Assist with the identification of issues (e.g. carve-out issues, etc) Manage information requests Challenge due diligence findings of the other party, if appropriate Assistance with analyzing the financial track record Analyze historical sale trends Analyze changes in EBITDA year over year Analyze the cost structure and break-even analysis Analyze capital expenditures Analyze historical working capital movements Analyze information on commitments, contingencies and litigation Framework Plan Design Analyze Report Monitor Assess Identify & Scope Collect Evaluate Deliver Review Objective: Objective: Objective: Objective: Objective: Objective: Understand the transaction Determine project scope & timeframe Collect data and key information Facilitate process/ provide key info Complete transaction Tasks: Tasks: Tasks: Tasks: Tasks: Tasks: Conflicts check & engagement letter Develop client agenda Begin general procedures Understand the business Identify key issues and risks Create checklist and plan for financial analysis Engage other parties Collect historical financial information Review business plan &financial information Data room preparation/ request Analyze financial track record Stress test assumptions & strategy Conduct valuation analysis Manage/ evaluate data room Deliver results & recommendations to the client Provide completion/ closing assistance Complete project & debrief Post-closing items Post-transaction meeting Occasional followup items Identify foolow-on opportunities

6 6 BDO Kazakhstan Assistance with company valuation Assistance with data room preparation and operation Assistance with closing activities, including: Read closing balance sheets prepared by Seller Analyze actual to budget variances for the period between initial due diligence and closing Analyze capital expenditures in the period to closing Identify and document issues identified in the closing of accounts Consider issues raised by during due diligence and assist in preparing explanations or mitigation responses Analyze preliminary working capital calculation based on provisions of sale and purchase agreement Understand the basis for pre-closing working capital adjustments (e.g. bonus accruals, capital expenditure accruals) Understand the basis for corporate adjustments in the closing balance sheets ABOUT BDO BDO International is the world s fifth largest accountancy network and was founded in Europe in At year end on 30 September 2014, BDO s global network provides advisory services in 152 territories, with nearly 60,000 people working out of 1,328 offices worldwide BDO International s global fee income for the year of 2014 amounted to US$7.2B, a 10.5% increase on the year from Audit and Accountancy makes up 57% of BDO International s global fee income. Stake on the local experience of BDO partner firms and their geographical proximity to customers is part of the BDO global strategy. Membership of each member-firm in the global network is a guarantee that the services provided comply to the high standards of BDO. BDO member-firms are active in all regions of the world, and the close cooperation among them made it possible to create a common strategy of the BDO, that is targeted at meeting the customer needs.

7 BDO Kazakhstan 7 WHY BDO? BDO s due diligence professionals assist buyers, investors, and sellers by taking a comprehensive, independent view of the target company s historical and projected financial performance. Key cash flow drivers and associated risks and opportunities are communicated in a clear and concise way, providing a complete picture of the financial realities of the business. The following list highlights indicative financial due diligence focus areas that can be tailored to specific client needs: Analysis of historical sales trends Analysis of changes in EBITDA year over year Analysis of the cost structure and break-even analysis Analysis of capital expenditures Analysis of historical working capital movements Analysis of information on commitments, contingencies, litigation, etc. Assistance with valuation Review of accounting policies Review of purchase and sale agreements We also offer cross-border transaction experience and depth. We work with transaction advisory teams in other countries via BDO s international network enabling us to access on-theground transaction expertise wherever you might need it. Our team is able to provide significant value and benefits to our clients on both sides of a transaction. Some benefits include: Buy-Side Project Benefits: Better understanding of the target business and increasing the likelihood of a deal achieving its objectives Early identification of deal breakers Identifying and understanding critical success factors used to inform acquisition decisions Deeper understanding of the underlying characteristics of the targets cash flows Identifying strengths that can be built upon or weaknesses that can be resolved Identifying key issues relating to the purchase price Minimizing waste and losses resulting from failed or illresearched transactions Sell/Vendor-Side Project Benefits: Addressing risks early, accelerating time to close Improving the accuracy of the historical and projected financial information contained in the marketing materials Providing the buyer with a transparent, objective, and credible view of the business Minimizing surprises and maximizing transaction value by adding credibility and objectivity to the process, especially where there has been no financial audit Identifying adjustments that positively impact EBITDA (typically, potential acquirers only inform sellers about negative adjustments) Increasing competition between buyers and minimizing buyer negotiations after the Letter of Intent Maximizing after-tax proceeds by addressing risks and optimizing the deal structure

8 CONTACTS Alberto Simoncini Executive Director Mobile: BDO Kazakhstan LLP 6 Gabdullin St. Almaty, , Kazakhstan Tel: Fax: info@bdokz.com 7/1 Kabanbay Batyr St. Astana, , Kazakhstan Tel: Fax: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Kazakhstan to discuss these matters in the context of your particular circumstances. BDO Kazakhstan, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Kazakhstan, a limited liability partnership, registered under the laws of the Republic of Kazakhstan, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.