When a company is being sold or is looking for an investor, it is often the case that business owners are not fully prepared for the financial due diligence requirements required by investors. This is often due to a lack of understanding of the differences between the annual audit and the due diligence carried out by the investor. Below, we review with the experts at Moore Hungary Financial Advisory why it is worth distinguishing between the two processes in a company sale.
The purpose of the audit
An audit is an essential part of ensuring that the financial statements give a true and fair view of the company's financial position and performance. However, audited statements do not cover all the details that may be important to a potential investor in a sale of a company.
What is the difference between financial due diligence and an audit?
In a company sale, financial due diligence provides a much deeper and holistic picture of the company's profitability and cash flows. While an audit examines the reliability of financial data, due diligence focuses on identifying future investor risks and opportunities.
Challenge: buying a used car
An often-used analogy in the company sale process is that an annual audit is like a car's service history, providing a certain level of information. However, the buyer still wants to do their own „due diligence” before buying to be sure of their decision. Similarly, financial due diligence is a personalised assessment of the financial situation of the selling company, tailored to the buyer's needs.
Sustainable profitability: why is EBITDA important?
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is one of the most important indicators in selling a business, as companies are often valued on the basis of a multiple of profitability. During the financial due diligence process, auditors examine the sustainability of revenues and costs and analyse whether the company's profitability is stable over the long term.
What is normalised profitability?
Unlike an annual audit, which only looks at the results for a given period, financial due diligence takes into account one-off or non-recurring items to give a more accurate picture of the company's sustainable profitability.
Net debt: a key factor in selling a business
In a sale of business transaction, the value of the company is determined on the basis of EBITDA, adjusted for net debt. This value affects the amount actually received by the seller at the end of the transaction. Net debt is the difference between financial debts (e.g. bank loans) and cash, but may also include other liabilities such as environmental liabilities or legal actions.
Net working capital: why is it important when selling a business?
Determining the net working capital is also essential when selling a company. The target net working capital at closing is calculated on the basis of the parties' agreement. The value may be based on net working capital from previous months or years and should take into account industry trends, seasonality and the economic environment.
Why is an annual audit not enough to sell a company?
The audit is designed to provide assurance on the reliability and accuracy of the financial statements, but does not address issues of direct interest to potential investors. A tailored financial due diligence, on the other hand, reveals the company's future prospects and hidden risks that are important for the sale of the company.
Summary
Understanding the differences between auditing and financial due diligence is key to the success of a company sale process. While an audit provides a degree of assurance on financial statements, it is not a substitute for thorough and tailored financial due diligence. Preparing the right due diligence will help the transaction run smoothly, avoiding unpleasant surprises and maximising the proceeds from the sale.
Moore Hungary
Moore Global, which started in a London office more than 110 years ago, is now one of the world's leading consulting and audit networks. Present in over 100 countries worldwide, the network has more than 600 independent offices and over 30,000 employees. The group's turnover for the last financial year exceeded $3 billion.
Moore Global's services will be directly available in the domestic market from March 2021. Moore Hungary has been offering a full range of consulting services in the fields of business, financial, tax, accounting and auditing with a team of almost 100 experts since its inception.
In our fast-changing world, Moore provides strategic guidance and practical advice to help clients navigate and understand the complex regulatory and changing market environment and industry conditions, and thereby find the best solutions.
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