Financial due diligence (FDD) and audits are some of the tools investors use to assess a company’s actual financial conditions before investing. While both instruments are similar in many ways, they also have some crucial differences. Keep reading to learn what financial due diligence is and how it differs from audits.
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Due Diligence and Audits
FDDs and audits are two ways investors can check a company’s performance and operational figures over a period of time. The main difference here is the timeframe: while audits typically cover the past year, financial due diligence services consider much longer periods. It’s a complex process, and that’s why most investors resort to the due diligence process by AcquinoxAdvisors when the situation arrives.
Some investors believe audits don’t consider enough time. While the figures might have boosted business valuation during the previous year, the situation might not be as good if a longer period is analyzed, for instance. In fact, the same can happen the other way around. According to specialists, investors must have more than a one-year track record before deciding whether that business is actually worthwhile.
Financial due diligence services examine a company’s financials over the past two years, sometimes even longer periods. They are also much more customizable than audits, which follow a rather strict methodology set by the International Standards of Auditing. Financial due diligence services offer much more flexibility on that end, allowing investors to analyze specific aspects of business practices, risks, finances, and objectives.
Main Aspects Analyzed in Due Diligence
FDDs can be customized to accommodate investors’ needs, but some are crucial. For instance, investors need to know whether a company is profitable and what prospects it has for future profitability. It’s also vital to check out its debt record, repayment plans, and debt-to-equity ratio.
This process also helps investors understand a company’s business strategies for growth in the short and long term, which in turn helps them analyze its growth prospects. Additionally, investors need accurate information about the net assets of the company they’re willing to invest. Finally, it’s vital to understand how much capital the company needs to achieve its promised goals.
What to Expect from the Results
Audits deliver a concise report where even the small inaccuracies in financial records are analyzed. Typically, it’s not longer than three pages. They can also say whether an incorrect statement was a small accident or made intentionally. Conversely, the best financial due diligence service delivers about 25 (often longer) reports where the Quality of Earnings is thoroughly analyzed.
FDDs partially employs the same models that are also used for assessing a company’s value. These include amortization, depreciation, tax, and interest. Additionally, audits can only be conducted by certified public accountants. Meanwhile, financial due diligence firms pull an entire team for the tasks, including lawyers and equity research analysts.
Undoubtedly, an accurate audit is mandatory for the decision-making process. Still, investors should consider a more detailed approach to the issue, and crucial information can be left out of traditional audits.
FAQ
When should investors consider hiring FDD services?
Investors should consider such services before deciding to invest in any given company. They’ll provide well-rounded information regarding a business’ activities, performance, and practices.
What’s the main difference between an FDD and audits?
The first is much more detailed and holistic than the second. Audits focus only on the accuracy of provided financial statements, while due diligence assesses depreciation, risks, competitors, business practices, and other aspects.
Where do you find the best equity advisors for the task?
Investors will find the best team equity advisors at Acquinoxadvisors.com. Acquinox Advisors is a top-tier M&A company with over 50 years of market experience and a long track record of successful deals.
Why are audits necessary?
Audits are used to assess the accuracy and validity of a company’s financial statements provided to potential investors. They can only be carried out by certified public accountants.
What is the debt-to-equity ratio?
The debt-to-equity ratio (D/E) calculates how much of a company’s operations are funded by its own resources or debt. As a rule of thumb, businesses with a high D/E offer more risks since they operate mostly on debt.
