woman using calculator at desk, analyzing and writing on financial income statement documents

A Guide to Due Diligence Finance, Insurance, and Tax Analysis

During the due diligence stage of a business merger or acquisition, it is important to thoroughly analyze the qualitative and quantitative data of the potential acquisition target to help determine if the transaction will succeed or fail. One key area to delve into is information about the target acquisition’s finances, insurance, and taxes. Various methodologies can be used to understand these areas, including inquiry and inspection of documents.

Learn more about this stage of due diligence to ensure you’ve reviewed all necessary documents prior to moving forward with an acquisition.

Key Finance, Insurance, and Tax Documents to Request and Analyze During Due Diligence

Before you move past the due diligence stage of an acquisition, you’ll want to see if the company’s financial, insurance, and tax documents match your acquisition goals. Since these documents can help you assess the financial state of the company and identify areas of concern, they’re incredibly useful for better understanding the target company and identifying areas that need further inquiry. Review the primary documents you’ll want to request and analyze below:

  • Financial statements 
  • Breakdown of revenue by client 
  • Accounts Receivable and Accounts Payable Aging Reports
  • Bank Reconciliation(s)
  • Listing of top vendors 
  • Debt analysis and listing of credit lines, notes, bonds, etc.
  • Payroll reports 
  • Project Reports
  • Tax Returns
  • Copies of any documents pertaining to the tax status of the company, including:
    • Pending audits 
    • Refunds
    • Litigation 
    • Special filing arrangements 
    • Other matters involving federal, foreign, state, or local taxing authorities

What to Focus on When Analyzing Key Financial, Insurance, and Tax Documents

When evaluating the above documents, you’ll want to evaluate some key areas of focus or concern acquirers typically inspect. For example, while you look at the above documents, it is important to note if the financial statement key metrics are in line with industry standards and with the acquirer’s standards. 

If you find that the documents don’t support your acquisition goals or standards, you’ll need to ask yourself a couple of questions:

  • Do your findings mean that the deal can no longer continue unless the target company makes changes to meet your standards?
  • Or, could the areas of contention be adjusted post transaction through efficiencies or cross-functional service offerings?

When choosing between either option during analysis, remember that the findings don’t have to be perfect. Rather, you’ll want to decide if they’re acceptable enough for the deal to continue.

What to Look for During a Financial Walkthrough

Through the due diligence inspection of financial matters, it is also an opportunity to gain an understanding of the company’s various financial processes through inquiry and a “walkthrough” of each process. Some areas that should be understood during this process include but are not limited to timekeeping policies, billing processes, employee expense processes, payroll processes, project reporting processes, and financial statement processes. 

Why You Should Request an Insurance Loss Report

When evaluating potential insurance issues within the transaction, requesting the insurance loss run report for the previous five years is critical. This report will give significant insight into any potential litigation or quality control issues the acquiree could have. If the report finds pending litigation or an excess of claims in the past few years, you should take the information as a red flag. Keep in mind that information about excess claims or pending litigation is typically very hard to get past to make the deal happen. 

Even when you find concerning information, it’s better than having it take you by surprise later in the process. Understanding information that can derail the deal during the due diligence phase saves time and money if the transaction does not continue. The earlier these concerns are identified, the earlier they can be addressed!

How to Make the Finance, Insurance, and Tax Analysis Stage as Successful as Possible

When performing due diligence over matters pertaining to the finance, insurance, and tax areas of an acquisition target, you’ll want to have a clear plan of areas of importance to keep the due diligence process on task and focused. As areas of concern are identified, staff should quickly document, share, and, in some cases, request supplemental information.

By quickly handling concerning information, you’ll allow your acquisition leadership team to make informed decisions regarding continuing the transaction, stopping the transaction, or potentially changing the terms of the deal to accommodate concerns identified. The key here is making sure your key team members and decision makers quickly receive accurate information!

Turn to Thinc Strategy for Merger and Acquisition Advisory Services

Whether you’re in the middle of due diligence or are just beginning to think about developing an expansion through acquisition strategy, Thinc Strategy can help. Our team of certified merger & acquisition (M&A) advisors has performed due diligence for many companies in the past, and can personalize the process for your unique needs. Our M&A advisory services also include feasibility studies, valuations, and leadership transition plans, ensuring we can walk you through every step of the process.

Learn more about our advisory services for mergers and acquisitions today. If you’re interested in our M&A services or have any questions, please contact us.