UHY Hacker Young | Chartered Accountants

What sets ‘excellent Financial Due Diligence’ apart from the ‘ordinary’?

7 January 2020

After the recent news of a stable government arising out of the general election, we have found a noticeable upturn in PE and major bank transactions in the North West marketplace. Quite clearly, a number of deals were on hold pending the outcome of the election, with particular reference to Labour’s manifesto pledge to abolish Entrepreneurs’ Relief, but also relating to the general climate of economic uncertainty, even without mentioning Brexit.

But what sets apart the excellent from the ordinary when it comes to FDD?

As a corporate finance partner and a former private equity investment lead, I am often asked what sets apart an excellent piece of FDD work from the ordinary. Most investment professionals are either qualified chartered accountants, experienced bankers or corporate lawyers by trade, and they do not want to be told in a paid report about that which they already know and have assessed the risk for in their investment appraisal thus far, i.e. prior to beginning due diligence.

Given my extensive experience in both the ‘poacher’ and ‘gamekeeper’ roles, I often talk to private equity people about this topic, and I set out below our combined thoughts:

Listen to your client

It is important that the FDD provider listens carefully to what the investor or lender want from the report, and what are the key risks that they have identified from their investment appraisal thus far.

Plan your work together

Having understood the transaction from the investor or lender point of view, it is important to then plan the scope and work plan as a consultative process with your client, whilst also obtaining buy-in of the management at the target.

Size and geography are important

The ability to understand the typical operating and control environments and accounting systems of the type, size and geography of the target business is critical to developing a rapport with the target management and staff. In a pressurised situation, getting the best quality information, in as open and transparent manner as possible, is vital to the outcome of the deal. It is important, therefore, for investors and lenders to carefully match the FDD firm with the size, type and geography of the target business.

Standard reports and standard work plans are not ‘special’

The FDD firm’s deliverables should ideally, where possible, not be in a ‘standard’ format or use a standard ‘audit’ style work plan; this is not what the client wants. When you listened to your client, they would have made clear how they view the potential investment or loan and the target business. What they see as the risk points and crucially what they want you to address, in what order of priority, often referred to as ‘red flag order’.

Excellent FDD reports are ‘special’

The very best reports, and the very best FDD providers, base their scope and work plan, and ultimately their deliverables (i.e. the report and executive summary), upon what their client wants and how their client views the transaction. A good FDD provider will then use the knowledge and experience of the best people in their firm to review those risks in that professional context, in priority or ‘red flag order’, so that during the course of FDD work if a red flag issue is identified then it is communicated immediately and therefore can avoid unnecessary work on low risk areas.

Communicate, communicate, communicate

Keep your client informed throughout the process of you conducting your FDD work; they will expect and appreciate it.

We can help

UHY Hacker Young’s Corporate Finance teams are busy working on FDD reports for local and national private equity firms, major banks, debt funds and corporate businesses.

For further details, or if you are interested in discussing your next transaction, please contact me or fill out our contact form.