The Essential Financial Due Diligence Checklist for Software Companies

Whether you are preparing for an acquisition or merger, a new investment, or a business partnership, financial due diligence checklist is an increasingly vital safeguard for any business.  If you’re interested in having your software acquired in the future, you need to have a clear financial document trail. 

Financial due diligence is a process that provides crucia

l insights into a business. When performed correctly, financial due diligence checklist will help you make better decisions regarding acquisitions and partnerships. After all, the last thing anyone wants to do is to buy a company that is a lost cause, financially speaking. 

While no process is entirely foolproof, conducting solid due diligence will help you spot potential problem areas. 

If you choose not to perform financial due diligence, you risk scaring off potential partners, investors, and buyers. At the same time, your current company could suffer from a lack of transparency, resulting in lost funding. 

What does the financial due diligence process look like?

Typically, the financial due diligence process is conducted by an outsider. This may take the form of a financial due diligence officer, and they are often armed with a checklist of items to collect, review, and analyze. 

There is no one set method or process for conducting due diligence. Still, the most common approach is to compare company financial data, statements, forecasts, and employee interviews with industry standards. 

Just as the process may vary, so do costs. For example, a financial due diligence report for a $500,000 company may cost as much as $5,000 to perform and could take anywhere between 1-2 months to complete.

Our essential financial due diligence checklist

What should you expect from your appointed financial due diligence officer? There are quite a few items that will need to be collected to perform a comprehensive review. If you ever plan on selling your company or attracting investment, you’re going to want to keep your financial records in good shape.

To help you stay on track, we’ve created an essential financial due diligence checklist. To keep our list simple, we’ve separated important items and questions into three distinct sections. 

Collect

In the collection stage, you’ll want to bring together as much information about your company and the buyer as possible. In addition to bank and transaction information, you may also want to review your business’s bookkeeping processes and other vital information such as:

• Financial statements
• Balance sheets
• Cash flow statements 
• Sales and Gross Profits
• History of pricing policies
• Tax details
• Debt and terms 
• Accounting processes
• Buyer information
• Prior purchases of the acquiring company 
• Number of company products, services, and assets

Review and Document

After you have collected all relevant information in the financial due diligence checklist, it’s time to review assets, review forecasts, and document all of the information gathered:

• Look up the rate of return
• Review accounts receivable 
• Review inventory and other assets
• Get a summary of all stakeholders

It’s also important to ask yourself the following questions:

• Does the buyer have the necessary licenses to run the business?
• If you have copyrights, trademarks, or patents, will you be leasing these to the buyer?
• Do you have any pending payments or invoices that need to be resolved?
• What are the current employee policies?
• Based on company information, is your business a strategic fit or investment?

Analyze

Finally, you should expect an analysis that verifies your company’s financial standing. The answers to the following questions can heavily influence potential acquisitions and investments:

• Is the information your providing verified?
• Are the margins of your company increasing?
• How do your margins compare to those of your competitors?
• Do the past, present, and future cash flow projections match expectations?
• Are there any consumer risks that need to be resolved?
• Are there any other liabilities that would transfer to the buyer?
• How do the financials stack up against what you already know from product and legal due diligence? 

Next steps

Financial due diligence checklist is an essential part of the acquisition or buy-out process. Whether you are the buyer, seller, or investor, keeping your financial documents in place is crucial to meeting long-term objectives and securing a solid future.

If you’re looking to sell your software, keeping organized records is necessary. Without having conducted a transparent audit, you run the risk of scaring off potential buyers. Start adhering to the checklist today to be best prepared for any and all potential acquisitions and investments.