Due diligence plays a very important role in Merger and Acquisition (M&A) transactions. It helps acquiring or investing organization understand everything possible about the target company. It is a critical step in determining whether a deal or project is worth doing. A due diligence investigation is also helpful in some other circumstances such as when a company is interested in finding out more before entering into business partnership with another company or when a manufacturer looks for an ideal OEM who can meet as many his requirements as possible.

A comprehensive due diligence normally includes legal, financial, and operational aspects, conducted separately by lawyers, accountants, and industrial experts. Financial due diligence analyzes, qualitatively and quantitatively, how the target has performed financially to get a sense of earnings on a normalized basis. Of course, it is more important to assess whether or not the target company's projections or anticipated performance is reasonable, objective, and achievable by looking at and analyzing its past.

In addition, financial due diligence analyzes the assets and liabilities to be acquired. For example, is the pricing for raw materials on par with market value? Are there finished goods in stock that are unlikely to be sold within the next three to six months? Regarding liabilities, it’s important to acquire only the liabilities that have been incurred for purchases of inventory or services that occurred prior to the closing date.

Finally, financial due diligence will look at whether taxes have been filed appropriately by the target company. Does it have any potential or hidden tax or social insurance liabilities? It’s important to ensure the target company has complied with all tax requirements.