In the fast-paced world of mergers and acquisitions (M&A), efficiency and accuracy are paramount to ensuring these complicated processes go smoothly. Financial due diligence (FDD) is a critical stage of these procedures, but the traditional process is often slow and labor-intensive. 

Automated FDD tools offer a way to streamline the process, improve accuracy, and save valuable time for both the acquiring firm and the target company. Continue reading to learn more about what FDD is, as well as how to do FDD more efficiently and effectively thanks to automated financial due diligence tools.

What is Financial Due Diligence?

Financial due diligence is the process of examining the financial records of a company to verify its financial health and identify potential risks and opportunities. It is a comprehensive assessment typically conducted by a third party hired by the buy-side of the transaction (the company buying or investing in the selling company. The latter is also called the “target”). These teams are often part of a CPA or financial consulting firm and are hired by the buyer to analyze the financials of the seller.

FDD is a crucial process for buyers to determine the financial health, as well as the risks and opportunities, associated with a business transaction.

Types of Due Diligence

While financial due diligence focuses specifically on a company's financials, other types of due diligence provide differing views of an organization’s operational health:

1. Tax Due Diligence: Examines a company's tax compliance and identifies potential tax liabilities. 
2. Legal Due Diligence: Reviews contracts, licenses, permits, and other legal documents.
3. Operational Due Diligence: Assesses a company's operations, including its management, employees, and processes.
4. IT Due Diligence: Examines the company's IT infrastructure, systems, and security.
5. Environmental Due Diligence: Evaluates the company's environmental compliance and any potential environmental liabilities.

Automation in Finance

Automation has revolutionized many industries, and finance is no exception. Tasks that were once done manually, like data entry, analysis, and reporting, can now be automated using software. This frees up finance professionals to focus on higher-value tasks, like strategy and advising clients. 

Many companies have found FDD automation tools to be game changers in their ability to assess the financial wellness of an organization quickly. Take Kroll, for example, who used automation to improve their margins and work quality.

Can Due Diligence Be Automated?

Many aspects of due diligence can be automated using specialized software. Automating time-consuming tasks like data extraction, normalization, and analysis reduces errors, standardizes processes, and frees up associates to focus on client service. 

Menial tasks such as document review, data preparation (including reformatting), running analysis and calculations, plus reviews, become instantaneous, meaning your teams get time back and can focus on more important things.

What does the Financial Due Diligence Process Look Like?

Traditional FDD involves a series of steps that are often manual and time-consuming, lowering a CPA or financial consulting firm’s profitability. A typical FDD process includes: 

1. Determine deal scope with client.
2. Send a data request list to the seller.
3. Wait. (days or sometimes weeks)
4. Review documents as they arrive and update the request list for missing or incomplete items. Repeat this until requests have been fulfilled.
5. Convert submitted data and documents into the Excel databook to use for analysis—highlighting any questions or items to be clarified by the seller management team.
6. Multiple levels of review of the databook to ensure accuracy and consistency.
7. Complete meeting(s) with seller management team, including standard questions and detailed questions about the provided data.
8. Complete analysis on key scope items, like the quality of earning or net working capital.
9. Convert databook and findings into a report for the client.
10. Write, review, and finalize report before sending to the client

What are Some Best Practices of High-Performing FDD Teams?

Here are several best practices that will help any firm looking to deliver high quality, profitable FDD services to clients: 

Create and Use Standard Templates

There are five core templates that a team should have to succeed in FDD: 

1. Proposal Template to demonstrate experience and capabilities of the team to win projects; 
2. Budgeting and budget-to-actual tracking templates to ensure each project is set up for and tracking towards success; 
3. Engagement letter approved by your legal team that is easily accessible (proposals and deal starts move fast!); 
4. Databook template, the core of the project; and 
5. Report template to deliver a consistent work product to clients.

Don’t Just Train—Document Procedures

The stakes and pace of M&A are high, and that means your professionals need to move quickly while maintaining accuracy and quality. While on-the-job training is critical for this type of work, make sure procedures are well documented and can be used by new team members to get up to speed quickly.

Evaluate and Use the Best Technology Tools 

Best in class teams take a holistic approach when determining which tools to use for FDD. This includes:

1. Cost and Value
2. Security and Privacy Standards
3. Specialization in Accounting 
4. Implementation, Customization and Integration
5. Adoptability by Your Team

How to Use Automation in Financial Due Diligence

FDD is rapidly changing with the emergence of technology that automates many time-consuming manual tasks. For example, certain tools can: 

1. Automate data extraction from a variety of sources, including accounting systems, spreadsheets, and PDFs.
2. Normalize data into a standardized format, making it easier to analyze, like delivering a fully formatted profit and loss statement into Excel.
3. Identify patterns and anomalies in the data that might indicate risks or opportunities.
4. Generate reports that summarize the findings in a clear and concise way.

LeaseCrunch, Finagraph, and Other New Financial Tools

LeaseCrunch and Finagraph have recently merged, bringing our clients even more powerful automated financial tools. We are proud to offer Strongbox, Finagraph’s flagship product, as one of the most effective FDD automation tools on the market today. 

One of the best parts about Strongbox is its ability to integrate with a variety of accounting systems, including QuickBooks, NetSuite, and Sage Intacct. Beyond just its ease of use and quick upstart time, Strongbox also automates data extraction, normalization, and analysis, and delivers clean, usable data in an Excel workbook format. Strongbox can help firms:

1. Reduce client burden by eliminating the need for them to generate reports or export data. 
2. Enhance team efficiency by bypassing manual data entry and allowing teams to focus on analysis. 
3. Improve accuracy by eliminating human error in data entry. 
4. Increase margins by reducing time spent manipulating data. 
5. Simplify multi-entity reporting by consolidating financials and offering consistent mapping

Other tools like Validis and AuditSight offer automation features for accounting firms. Validis integrates with major accounting systems and automates data extraction, standardization, and analysis, saving clients at least 8 hours per engagement while increasing quality of work. 

AuditSight focuses specifically on audit needs and offers detailed data traceability and verification, streamlining and automating the verification of accounting records.With AuditSight, companies can eliminate anywhere from days to weeks from their client engagements.

Reach out to us today to inquire about integrating a due diligence software into your existing process!

FAQs

What are the benefits of using automated FDD tools? 

Automated FDD tools save time, improve accuracy, reduce costs, and free up teams to focus on higher-value tasks. 

Are automated FDD tools secure? 

Reputable FDD tools prioritize security and compliance. Look for tools that offer SOC 2 Type II certification and comply with data privacy regulations like GDPR. 

How much time can I save with an automated FDD tool? 

Strongbox can save firms 8-15 hours per deal. However, time savings vary depending on the tool and the complexity of the deal.

How do I choose the right automated FDD tool for my firm? 

Beginning factors to consider when choosing an automated FDD tool include the types of deals you typically work on, the accounting systems your clients use, your budget, and the level of support you require. If you need more expertise to help you decide, don’t hesitate to reach out to us here at Strongbox.

What is the future of automation in FDD? 

AI and machine learning will continue to play an increasingly important role in FDD, leading to even greater efficiency, accuracy, and insight.