Financial and Commercial Due Diligence

The Financial and Commercial Due Diligence on the Client to cover the below:

  • Business Overview.

– Summarize the businesses history, activities, overall strategy and, through discussions with management, comment on proposed changes to the existing businesses

– Summarize the current businesses structures and describe how the businesses are managed

– Summarize and comment on the businesses operational structures

– Summarize corporate governance structure and remits of oversight committees

– Provide an overview of the operational capacity, revenue streams, key customers and suppliers

– Summarize the nature of key customer relationships, highlighting how key accounts are managed

– Summarize the nature of trading relationships with key suppliers

– Comment on the organizational structure and roles of the key management team

– Understand and comment on trading with related parties, its rationale, the existence of significant trading at non-arm’s length terms and its impact on financial performance.

– Comment on Management’s assessment of separation issues in respect of related parties following the proposed transaction.

  • Financial Results

– Obtain historical financial information for the period under consideration ( 5 years) and provide a summary of: Income statement, Balance sheet, and Cash flow statement.

– Summarize the annual profit and loss account for the historical period, highlighting the key elements of the trading performance (i.e. key drivers of revenue, cost of sales, overheads).

  • Revenue Analysis

– Present an analysis of the composition of revenue and key drivers of revenue growth over the historical period

– Summarize the trading results for each revenue stream over the historical period, highlighting principal elements of those trading results (i.e. key drivers of revenue growth for the individual revenue stream, seasonality, etc.)

– Summarize the geographical split of revenue generated over the historical period, highlighting any changes in concentration

– Analyze and comment on the top 10 contracts/customers including dependency and the ability to generate repeat business and/or growing business activity with key accounts

– Read the agreements with the top 10 contracts/customers and summarize the key trading terms including reference to unit pricing, payment terms, other discount incentives, etc.

– Comment on the length of relationship with existing customers and customers lost in the historical period

– Obtain details and comment on the impact of any new revenue streams introduced during the period under consideration and change in revenue concentration over the period

– Through discussions with management, comment on nature of items included as other income

– Based on analysis and discussions with management, identify and comment on one off sources of revenue during the period under consideration.

  • Cost and Profitability Analysis

– Cost of Sales

– Present a summary of and comment on the cost base split by key categories (such as staff costs, raw material costs, etc.);

– Analyze and comment on the cost base by process/product category

– Summarize key trends in contribution by revenue stream during the historical period, and KPIs, i.e. Gross margins, product volumes and unit price, other KPI’s monitored by management to evaluate financial performance.

– Overheads

– Present a summary of the overheads split by broad category (staff costs, selling expenses, administrative expenses, finance costs, etc.)

– Analyze the rental costs and comment on the key financial terms of the rental contracts

– Analyze and comment on other key expense categories of the Target

– Analyze and comment on the finance costs incurred

– Comment on the costs for shared services and the cost allocation methodology between the subsidiaries

– Through discussions with management, summarize the nature of and extent to which the business is sensitive to movement in exchange rates

– Summarize and comment upon the fixed, semi variable and variable cost elements of the cost base for the historical period

– Summarize all non-cash expenses (depreciation, provisions) and comment on significant movements therein during the period under consideration.

– Profitability

– Analyze and comment on the profitability (gross profit, EBITDA and net profit)

– Prepare an EBITDA bridge for the historical period under consideration highlighting key growth drivers

– By reference to the underlying last 12 months (LTM) actual trading results, comment on the EBITDA run rate

– Quality of earnings-Through discussions with management identify and comment on key one off items / non-recurring / exceptional items (revenue and expenses) included in the historical financial results to present analysis of the key underlying earning potential of the business

– Actual versus budget analysis

  • Employees

– Analyze the staff costs and headcount for the historical period between the key departments and senior management/directors

– Describe key management and their roles, and summarize the principal terms and conditions of their employment contracts, including – bonuses and any golden parachutes

– Through discussions with management, identify employees considered critical and comment on their potential impact on future business performance.

  • Balance Sheet

– Analyze the balance sheet and comment on the significant classes of assets and liabilities

– Analyze PPE by key category and, through discussions with management, comment on the age, current condition and quality of the asset base

– Comment on management’s depreciation policy for the various asset classes

– Through discussions with management, summarize historic capex spend (split between ongoing/maintenance and discretionary spend)

– Through discussions with management, summarize the historic maintenance spend incurred

– Summarize other receivables and other payables, highlighting significant features

– Through discussions with management comment on EOSB provisions

– Analyze the composition and nature of provisions for other liabilities

– Analyze and comment on the nature and composition of other financial assets and movements therein

– Comment on the nature of and movements in the shareholders current account

– Through discussions with management, summarize and comment on contingent liabilities and future material commitments (e.g. leasehold – property guarantees, deferred consideration, rental obligations)

– Comment on any changes to the share capital structure in the historical period.

  • Working Capital Analysis

– Through discussions with management, summarize the working capital cycle and key drivers, highlighting controls operated in relation to such balances and opportunities to improve working capital cycles

– Analyze the composition of the working capital balances over the historical period, highlighting salient features

– Summarize the monthly net working capital position over the historical period highlighting key trends, peaks and troughs, and average requirement over the last 12 months

– Analyze inventory balances and ageing by revenue stream

– Through discussions with management, summarize management’s basis for and procedures to value inventory

– Comment on slow moving inventory, provisions against them and historical inventory write offs

– Summarize and comment on the composition and ageing of trade receivable balances over the historical period and through discussions with management, comment on the recoverability of receivables over the historical period, highlighting provision policies and write offs

– Comment on unbilled revenue, if any

– Analyze and comment on the composition and ageing of trade payables

– Comment on relationships with key suppliers and financial terms included in key long term contracts with suppliers

– Through discussions with management, present and comment on the normal working capital levels.

  • Cash Flow Analysis

– Analyze and comment on the historical cash flows. Through discussions with management, comment on the drivers of cash generation and conversion of EBITDA to cash during the historical period

– Through discussions with management, comment on the cash flow impact of exceptional/one-off items

– Comment on monthly and intermonth cash flow patterns

– Comment on other cash flow items, including key financing items

– Comment on cash flow management.

  • Net Debt Analysis

– Summarize and comment on external borrowings, highlighting key banking relationships, drawdowns against facilities, maturity profile of the loans and other key financial terms

– Through discussions with management identify and comment on other debt like items within balance sheet and present an indicative adjusted net debt position at the latest balance sheet date.

  • Accounting Fundamentals and Management Control

– Summarize the principal accounting policies used, compliance with IFRS and comment on the consistency of accounting policies used during the period, including any recent or contemplated changes in accounting policies or estimates.

– Summarize the structure of the finance function, highlighting key responsibilities of staff

– Describe the monthly and annual reporting processes (including timetable, content, basis of preparation including method and extent of consolidation, and extent of management review) and comment on the timeliness, accuracy and consistency of management information

– Based on discussions with Management, comment on the methodology used to prepare the financial information presented (including systems and controls)

– Summarize key issues arising from management letters issued by the external auditors and through discussions with management, comment on significant reconciling items between the management and audited statutory accounts

– Provide a reconciliation of management accounts presented to audited financial statements

  • Forecast

– Comment on material underlying assumptions

– Compare the forecast performance to historical results taking into account contract analysis e.g. future contracted order book and pipeline (including potential new contracts, contract run-off and renewals)

– Comment on key capital requirements of the business (committed and discretionary).

  • Company Assessment

– Understand management views on

– Current positioning

– Historical strategy and performance

– Future strategy and expected performance, including rationale and supporting evidence underlying forecasts.

  • Market Assessment

– Evaluate the size of the market, by segment

– Assess the expected growth of each key segment of the market

– Conclude on the expected future growth of the Company’s market.

  • Competitive Assessment

– Identify the key competitors

– Profile up to 3 key competitors, including (on a best efforts basis): background, offering, positioning, historical performance, future strategy, etc.

– Evaluate the historical positioning and performance versus its key competitors

– Evaluate the expected future performance versus its key competitors

– Conclude on the expected future market share change.

  • Implications on Forecasts

– Conclude on the prior phases of work

– Conclude on the expected performance going forward, in light of findings on the market, competitive landscape, and customer requirements

– Identify potential strategies to maximize value post-acquisition

– Identify potential risks and highlight risk mitigation strategies.

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