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Insights — Exbo Group

Assessing Financial Health through Rapid Diligence

Financial Due Diligence
Minute read

Rapid Diligence involves analyzing a company’s historical and prospective financial and operational information. It results in a report similar to a Quality of Earnings, but takes about half the time because it involves less of a deep dive. A buyer will therefore choose a Rapid Diligence report rather than a full-scale Quality of Earnings report when they’re trying to make a purchase quickly. It’s a much higher-level view, and the focus is on the areas most important to buyers. 

When Would a Company Need Rapid Diligence?

A Rapid Diligence report is efficient in scenarios where time is of the essence, such as mergers and acquisitions, strategic partnerships, or investment considerations. This report gains a quick but robust overview of the target company's financial landscape, enabling timely and well-informed decisions without the wait time of a traditional audit.

Why is Rapid Diligence Important?

Rapid Diligence minimizes the risks associated with business transactions.

The resulting report offers a comprehensive understanding of a company's financial standing, operational intricacies, and potential vulnerabilities, which empowers stakeholders to make quick but informed decisions.

What Are the Components of a Rapid Diligence Report?

A Rapid Diligence report sheds light on areas that could potentially raise red flags and threaten a deal. Generally, the report would include:

Business Overview

An understanding of the business and its operations after working  with and observing the sellers for a week or two. The Business Overview includes things like the company’s origins, main products, and location. It also includes an accounting summary, outlining the timing of the company’s fiscal year, where their financials are maintained, and whether or not the company is audited, by whom, and for how long.

Revenue Analysis

An assessment of revenue recognition. The Revenue Analysis summarizes the target’s main revenue drivers, accounting methods, and customer base, in addition to breaking down recurring vs. non-recurring revenue streams. 

Gross Margin Analysis

An evaluation of the gross profit margins of the target business. It includes items currently in the target business’ Cost of Sales and whether more should be included.

Vendor Analysis

An illustration of which vendors the target company spends money on and how much they’re spending monthly and annually. It examines the vendor expenses during the period under review. 

Payroll Analysis

A categorization of personnel expenses by pay type and employee type. It shows employees’ departments, costs per department, and each department’s headcount.

Bank Reconciliation

An assessment of the completeness and accuracy of bank-to-book reconciliations. This may be the least glamorous step in rapid diligence, but is debatably the most important because it provides the foundation for the remaining analyses. If these numbers don’t check out, there are likely material errors or even fraud.

Final Thoughts

Rapid Diligence reports are invaluable tools in the fast-paced world of business transactions. These reports provide indispensable insight into target companies to help buyers determine the risks of mergers and acquisitions. As businesses continue to navigate the complexities of the modern marketplace, Rapid Diligence reports will help them make swift, informed, and risk-mitigated decisions.