Financial due diligence is not an audit. It aims to help a buyer understand what it is acquiring, what could change the price, and which findings need to be reflected in the sale agreement. Its scope is best set by reference to the decision and the risks that matter to it.
Main areas
In an owner-managed business, reported profit may reflect choices that will not continue after completion, such as owner remuneration, related party rent or one-off items, so quality of earnings is usually central. Working capital and net debt matter because the completion mechanism, rather than the headline price, often determines the cash that changes hands. Other areas include undisclosed or contingent liabilities, including tax exposures, and how far the business depends on the seller's personal relationships. Where the target transacts with associated companies, HASiL's transfer pricing guidance may be relevant; see our article on transfer pricing documentation.
From findings to the agreement
It helps to record which matters were verified and which rely on explanations from management. Discuss findings with the buyer’s legal advisers so that material issues are reflected, where appropriate, in the price, completion adjustments, conditions, warranties or indemnities. Agree the scope by reference to the transaction’s risks, the reliability of the records and the buyer’s exposure. A smaller deal may justify a focused review, but familiarity with the seller is not a substitute for testing material assumptions.
For related reading, see our article on valuing a Malaysian private company.
This article is general information only. Requirements depend on each transaction's circumstances; please refer to HASiL's official guidance, and see Saifudin & Co's corporate finance and transactions services if you would like assistance.