Financial Due Diligence

Periods of growth and decline in business may replace one another almost unnoticed. A company that demonstrated stable financial results yesterday may today face serious difficulties or even approach bankruptcy. At the same time, the actual financial condition of a business is not always clear to potential investors, creditors, or buyers.

In practice, there are various instruments of so-called pre-sale business preparation that may create an attractive but not always objective picture of the company’s financial performance.

To obtain a realistic understanding of the financial and economic condition of an enterprise, it is advisable to engage independent professionals and use a dedicated instrument known as Financial Due Diligence.

The specialists of VINCO’S are ready to provide comprehensive support in this area. Our team conducts financial reviews of businesses, analyzes assets, liabilities, financial indicators, and potential risks, and prepares a report with conclusions and practical recommendations.

Financial Due Diligence may be useful for various categories of clients, including:

1. potential investors;
2. business owners;
3. creditors;
4. underwriters in connection with the placement of a new issue of shares;
5. buyers of a significant share in a business or the entire business.

Please note. International practice confirms that Financial Due Diligence may be appropriate at different stages of business creation, development, or transformation, including:

• during the development of a business idea or project — to assess the need for financing and determine possible sources of funding;
• when a startup enters the market — to evaluate the feasibility of capital investment;
• during business expansion or entry into new markets — to identify potential risks that may slow down development;
• before the placement of shares on a stock exchange — to analyze the company’s investment attractiveness;
• before reorganization, sale of the business, change of management, or during a crisis — to assess opportunities for stabilizing the financial condition and further development of the company.

The primary purpose of a comprehensive financial review of a company is to identify obvious and hidden risks that may negatively affect the financial stability of the business in the near future.

Obvious risks often found in the Ukrainian business environment may include the use of questionable tax optimization models, such as paying remuneration to employees or de facto staff members through individual entrepreneurs, as well as other grey financial schemes.

Hidden risks may include guarantees for third-party obligations, breaches of contracts that may potentially lead to disputes with counterparties, and the existence of off-balance-sheet or contingent liabilities.

In general, risks increase significantly if the company maintains parallel management or unofficial accounting in addition to official accounting records. Conversely, a transparent financial model and business processes conducted within the legal framework are positive factors when assessing a business.

Important. Financial Due Diligence helps answer a key question: whether the company’s historical financial results can be maintained in the future. Where necessary, the review also helps identify distortions in the financial picture related to pre-sale business preparation.

For example, a business seller may enter into several favorable transactions with related parties or extend payment deferrals for customers in order to artificially improve revenue figures before the transaction is completed.

During Financial Due Diligence, VINCO’S specialists may address the following tasks for clients:

• verification of the reliability and completeness of the company’s financial or accounting statements;
• general assessment of the quality of financial and accounting records;
• express inventory of key assets;
• analysis of sales dynamics, margins, income and expense structure;
• assessment of the company’s debt burden;
• analysis of debts and liabilities;
• identification of off-balance-sheet liabilities, overdue accounts payable, and contingent liabilities, including sureties;
• review of income and expenses by business segment and key counterparty;
• identification of fictitious or non-recoverable financial investments;
• analysis of illiquid current assets;
• identification of overdue accounts receivable;
• assessment of the completion status of current investment projects;
• targeted collection, analysis, and interpretation of information upon the client’s individual request;
• financial calculations necessary for making management or investment decisions.

Note. Particular attention may be given to events occurring after the balance sheet date, as they may result in significant adjustments to financial statements and affect the client’s decision.

There is no universal form of a Financial Due Diligence report. Its structure depends on the objectives of the review, the specifics of the business, the scope of documents provided, and the client’s request.

At the same time, it is important to note that the indicators, conclusions, and forecasts included in the report are valid as of the date of its preparation, unless otherwise expressly stated in the report.

Most often, the report analyzes the following indicators.

EBITDA is a profitability indicator that shows a company’s earnings before interest, taxes, depreciation, and amortization.

It is used to assess the operating efficiency of a business without taking into account the impact of its financing structure, tax burden, or depreciation and amortization policy.

Net Working Capital, or NWC, reflects the amount of the company’s working capital.

An increase in NWC may indicate improved liquidity and creditworthiness of the business. At the same time, excessively high values may signal inefficient financial policy, including the use of expensive or inappropriate sources of financing, as well as possible understatement of accounts payable.

Net Debt reflects the overall debt burden of the company and affects the assessment of its financial stability and liquidity.

This indicator is considered when analyzing the company’s ability to service debt, pay interest, and repay the principal amount of debt.

Free Cash Flow, or FCF, shows the amount of funds that may be withdrawn from the business without harming its future operations.

When calculating this indicator, the company’s internal needs, investment expenses, and the necessity to maintain operating activities are taken into account.

If you want to obtain an objective assessment of a company’s financial condition, identify risks, and understand the real investment attractiveness of a business, VINCO’S experts are ready to provide comprehensive support in conducting Financial Due Diligence.