3 Major Themes from Public Healthcare Firms during COVID-19 – Part 3: Mergers & Acquisitions
October 19, 2020
Having the advantage of being integral to thousands of healthcare transactions each year, VMG Health’s healthcare Financial Due Diligence experts are able to provide proprietary insight and market intelligence to our clients. Our professionals have the domain expertise and skills to assist organizations with the numerous types of analyses and support to enable effective strategic decision making.
What is financial due diligence?
Financial due diligence is a process of investigating, verifying and/or validating the integrity of a company’s financial information relative to a potential transaction or investment. Financial due diligence is performed prior to the close of a transaction to provide a potential buyer assurance of the company’s financial performance.
Transactions that undergo a thorough due diligence process typically provide a higher chance of success. Due diligence helps assure that a potential buyer is making an informed decision by enhancing the quality of information available to all decision makers.
From a buyer’s perspective, financial due diligence allows a buyer to gain comfort that their expectations regarding the transaction are validated. Relative to a merger and/or acquisition, purchasing a business without performing due diligence substantially increases the risk to the buyer / purchaser.
From a seller’s perspective, financial due diligence is conducted to provide assurance to a buyer / purchaser and build trust that’s what’s being purchased has been vetted for potential exposures and the integrity of information and accuracy of their financial statements have been reviewed and free from errors and omissions. While going through such a rigorous process, many sellers discover that the fair market value of their company is more than what they initially thought to be the case. Lastly, many sellers that undergo such a process are more prepared for the onslaught of questions and information that a buyer will need to gain comfort as they perform their own due diligence.
Reasons for Financial Due Diligence
There are many reasons why due diligence is conducted. Noted below is a list of common reasons for such diligence:
Financial Due Diligence Type of Analysis
When performing financial due diligence, the main areas of focus typically relate to a company’s (i) quality of earnings, (ii) debt and debt like items, and (iii) normalized level of working capital. Refer below for further insights.
Quality of Earnings – Potential buyers focus on the historical earnings of the acquisition target excluding non-recurring and one-time costs/expenses, as this will affect the valuation of the company. The items highlighted below provide an overview of the typical type of adjustments that are proposed at deriving at a company’s quality of earnings.
Costs of Due Diligence
The costs of undergoing a due diligence process depends on the type of transaction, transaction size, scope of work, and duration of the effort, which depends heavily on the complexity of the business and/or transaction. Such costs are easily justifiable compared to the risk associated with making an uniformed decision. Parties involved in the transaction typically determine who bears the expense of performing due diligence. Both the buyer and the seller typically pay their own diligence expense associated with hiring investment bankers, lawyers, accountants, and other consulting advisors.
Why Due Diligence Matters
Financial due diligence helps buyers, sellers, investors and companies understand the nature of the transaction, the risks and exposures involved, and whether the transaction is the right investment for them. Essentially, undergoing a thorough due diligence process is like doing your “homework” about a potential investment and is essential to make a sound decision.