Financial Due Diligence
Description of possible reviews and their scopes of work                                                          Back to Due Diligence Panel

1. Full due diligence

What is it?
Full due diligence procedures are designed to give the acquirer or investor the best possible information with which to make decisions and with which to negotiate. Although full scope procedures are designed to be thorough and cover all applicable areas of financial and business review, priority is given to risk areas or areas of key concern to the acquirer or investor.

When is it recommended?
Full due diligence procedures are recommended in most situations. There is usually no substitute for high quality information and analysis in corporate transactions, especially in competitive bid situations or where the acquisition price can be negotiated. However, the information needs of the acquirer or investor should be balanced against the timeframes and levels of inherent risk involved in a transaction.

2. Limited review

What is it?
A limited review comprises less than full due diligence procedures. Limited reviews aim to reduce the scope of work to target specific areas, usually in the context of a restricted timeframe for due diligence and existing information available (such as a vendor due diligence report).

When is it recommended?
Limited reviews are common where the acquirer or investor already has access to certain information on the target company, and can safely identify risk areas or areas of key concern. Limited reviews may also be used following a desk-top review as part of a two-stage approach (see below).

3. Desk-top review

What is it?
A desk-top review comprises a high-level review of key financial information. The scope of a desk-top review normally includes analytical review procedures on historical profit and loss account, balance sheet and cash flow information, and may also include a high-level review of projected results. Analytical review procedures are complemented with key financial management interviews. Analysis of source documentation is usually limited or non-existent.

When is it recommended?
A desk-top review is usually recommended if the investment risk is low. An example of where this may be the case is in the context of a group acquisition. Whereas full due diligence procedures may be applied to larger group companies, a desk-top review may be more efficient for smaller group companies, which have limited relative importance to the deal. Desk-top reviews may also be used as part of initial transaction reviews, possibly before a Letter of Intent has been agreed.

4. Two-stage approach

What is it?
A two-stage approach allows the investor or acquirer to limit due diligence procedures initially before further procedures are performed at a later date. Either a desk-top review or limited review procedures make up a first stage of due diligence. Depending on the context of the transaction and of the investor or acquirer’s concerns, it may be decided that further due diligence procedures are required. This additional due diligence may include tailored scope items or be full due diligence procedures.

When is it recommended?
A two-stage approach aims to avoid potentially time-consuming and costly due diligence procedures where they may not be required. It is usually only recommended, however, where the investor or acquirer has a significant amount of time to analyse a transaction, or where negotiations are still in early stages. A two-stage approach is often most applicable where strategic decisions form a key part of an investment decision, as initial procedures allow the acquirer or investor to reassess the transaction from a strategic point of view and investigate further as required.