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A Practical Guide to Financial Due Diligence PDF

544 Pages·2021·129.054 MB·English
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A Pr a cti c al G ui d e t o a Fi n a n ci al i d D u e Dili g e n c e n I l a n o i s s e f o r P B. D. C h att e rj e e Sec o n d y E diti o n [F C A, A C M A, A C S, Dip IF R ( A C C A - U K)] r Hi g hli g hts u • Co m mentary on the due diligence approach with broad e mphasis b on financial due diligence both on the sale side and the buy side. • Drill do wn of relevant sections of the Financial State ments through s control assess ment checklists, • Application of Enterprise Risk Manage ment and its i mpact on m financial due diligence. • Illustrations and case studies picked up fro m practical experience of the author. o • Contains detailed questionnaire providing guidelines on ho w to carry out a financial due diligence exercise. o l B A Pr a cti c al G ui d e t o Fi n a n ci al D u e  Dili g e n c e A Pr a cti c al G ui d e t o Fi n a n ci al D u e  Dili g e n c e S e c o n d E diti o n B. D. C h att erj e e A C A, A C M A, A C S, Dip IF R ( A C C A - U K) First published in India 2020 Second edition, 2021 © Bloomsbury Publishing India Pvt. Ltd All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. No responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this publication can be accepted by Bloomsbury or the author. The content of this book is the sole expression and opinion of its author, and not of the publisher. The publisher and author in no manner is liable for any opinion or views expressed by the author. While best efforts have been made in preparing this book, the publisher makes no representations or warranties of any kind and assumes no liabilities of any kind with respect to the accuracy or completeness of the content and specifically disclaims any implied warranties of merchantability or fitness of use for a particular purpose. The publisher believes that the content of this book does not violate any existing copyright/intellectual property of others in any manner whatsoever. However, in case any source has not been duly attributed, the publisher may be notified in writing for necessary action. BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc ISBN 978-93-54352-06-5 10 9 8 7 6 5 4 3 2 1 Bloomsbury Publishing India Pvt. Ltd DDA Complex, LSC Building No.4 Second Floor, Pocket C–6 & 7, Vasant Kunj New Delhi 110070 Phone: +91-11-40574957, 40574954 www.bloomsbury.com CIN: U22130DL2012PTC232353 To provide feedback, please mail at [email protected] Printed and bound in India by Rajkamal Electric Press, Kundli To find out more about our authors and books visit www.bloomsbury.com/in/academic/accounting-tax-law Here you will find extracts, author interviews, details of forthcoming events and the option to sign up for our newsletters. A b o ut t h e a ut h or B D Chatterjee is a finance leader with over 35 Years of rich industry experience in overall business and finance function. He is a Chartered Accountant with CS and C M A qualifications and holds a diplo ma in IF RS fro m U K. During his long and enriching career he has handled many high-profile leadership positions like CF O/ VP/ Director Finance assign ments in global Multinationals ( B O C Gases, DuPont, and Kelly Services) both in India and abroad and large Indian conglo merates ( Mother Dairy group, Max India) in India. In handling the above positions, he acquired extensive kno wledge and experience in industries like industrial gases, engineering poly mers, agro che micals, F M C G and dairy products, health care and manpo wer services, a mong others. Apart fro m above, he also has deep consulting experience in managing CF O solutions including Enterprise Resource Planning Syste ms projects in various industries spanning fro m food and beverage (Pepsi Co franchisee), teleco m, auto ancillary industries, and Quick Serve Restaurant chain ( Mc Donalds) to na me a fe w. He possesses expertise in i mple mentation of best practices in finance, corporate governance, change manage ment through corporate restructuring, business process and financial re-engineering and enterprise Risk Manage ment. He has rich experience in Mergers and Acquisitions including financial due diligence and business valuation. He had also been associated with an International Institute as a visiting faculty and taught finance professionals Diplo ma in IF RS as well as certificate courses of IF RS organized by A C C A Global ( U K). Currently, he is associated with a reputed International Think Tank A C C ESS Health International Inc as their global CF O for the past four and half years. The operation of the organization spans across countries like the United States, India, China, Middle East, and Southeast Asia. This stint has provided hi m invaluable experience in handling global finance and ad ministration in digital space, intricate co mpliance manage ment prevailing in various countries, risk manage ment and international governance processes like global Audit and Assurance process including Audit Co m mittee and international Board Meetings. He is an established author, and his books include conte mporary business and finance topics like International Financial Reporting Standards (IF RS), Indian v A Practical Guide to Financial Due Diligence Accounting Standards (Ind AS), Business Valuation, Financial Due Diligence, Enterprise Risk Manage ment and Corporate Governance published by reputed publishers. Linked in proffle: in.linkedin.co m/pub/bis wajeet-chatterjee/2/5a9/b6/ Address: 121/105 Silver Oaks Apart ments D LF Phase I Gurgaon 122002. H A R Y A N A Mobile: 9810119275 vi Pr ef a c e In these uncertain ti mes we witness on the one hand conventional businesses going out of existence one by one and on the other ne w doors of opportunities opening up in other spheres. As a fall out of this, the e mergence of inorganic gro wth through mergers and acquisitions has beco me more relevant, where ffnancially viable organizations are planning to take over the co mparatively weaker organizations to bring about more synergies and usher in consolidation and gro wth for the foreseeable future. This thought induced me to co me up with a book on Financial Due Diligence based on my practical experience of many years. It is kno wn that an e fiective Financial Due Diligence exercise is the cornerstone of a successful Merger & Acquisition deal bet ween a prospective buyer and a seller willing to carry out an ar m’s length deal thro wing up a win- win situation for both. A robust Financial Due Diligence is even more necessary in today’s business environ ment to critically assess the health and hygiene of the target entity to drive a proper valuation acceptable to both the constituents. The book professes to address the follo wing areas: (a) It starts with a curtain-raiser on corporate restructuring including the possible i mpact of the ongoing pande mic on the target organization, (b) It provides a broad co m mentary on the due diligence approach, (c) The seller side approach to financial due diligence and the pitfalls leading to a proverbial black hole of valuation has been explained, (d) A deep dive is carried out into the buyer side approach to financial due diligence including detailed checklist to revie w and evaluate each section of Financial State ments, (e) It delves into the tools used to handle financial due diligence, which are: – Financial modelling; – Financial state ment analysis and use of financial ratios; – V arious methods in use in Business Valuation with illustrations; – Distress Analysis of target entities. (f) It discusses in detail Enterprise Risk Manage ment through control environ ment, mitigating and detective controls and its i mpact on Financial Due Diligence approach, (g) Finally, it highlights certain practical case studies, which I picked up fro m my experience of many years in this field. (h) At the end, a brief questionnaire has been added as guidance to carry out financial due diligence exercise. vii A Practical Guide to Financial Due Diligence I would like to take this opportunity to mention that while considerable care has been taken to ensure that the contents of the book are accurate, a fe w errors and o missions might have crept in, for which I seek with all hu mility to my readers to bear with me. I would like to dedicate this book to my wife Debika, my daughter Bidyut and my son Badri, all of who m have stood by me while developing this body of work. B D Chatterjee E mail: bdchatterjee105 @g mail.co m viii C o nt e nts at a gl a n c e About the author .......................................................v Preface .............................................................vii Table of contents ...................................................... xi Chapter 1 Corporate Restru cturing ...................................1.1 Chapter 2 Due Diligence Approach ..................................2.1 Chapter 3 Seller side Financial Due Diligence ..........................3.1 Chapter 4 Buyer side Finan cial Due Diligence .........................4.1 Chapter 5 Financial Modelling ......................................5.1 Chapter 6 Financial Health and Hygiene Analysis .......................6.1 Chapter 7 Business Valuation Methods ...............................7.1 Chapter 8 Risk Manage men t and Financial Due Diligence ................8.1 Chapter 9 Distress Analysis ........................................9.1 Chapter 10 Case Studies ...........................................10.1 Annexure Financial Due D iligence Questionnaire ......................A-1 ix

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