What's the day-to-day financial due diligence work an analyst carries out? Do you work on models? Use gearing ratios? Are there any common types of 'work' you would be involved in across the industry at an entry-level position?
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Based on the most helpful WSO content, here's what you need to know about financial due diligence for M&A transactions and debt advisory work:
Financial Due Diligence in M&A Transactions and Debt Advisory Work:
Quality of Earnings:
Sales and IT Systems:
Buy-Side and Sell-Side Diligence:
Accounting Heavy:
Travel:
Day-to-Day Financial Due Diligence Work:
Modeling:
Performance Drivers and Downside Scenarios:
Deal Teams:
Common Types of Work at Entry-Level:
Financial Modeling:
Valuation:
Balance Sheet Analysis:
Management Rapport:
Due Diligence Management:
By focusing on these areas, entry-level analysts can develop a strong foundation in financial due diligence and contribute effectively to M&A transactions and debt advisory work.
Sources: Q&A: Big Four Valuation Associate - Deciding Whether This Job Is Right For You, Credit Analyst Q&A, Advice for New Analysts Seeking PE Exits, Q&A: Operational Due Diligence Analyst, Career Bankers: Coverage vs M&A
3 core areas of FDD report are 1) Quality of Earnings 2) Net Working Capital 3) Net Debt.
You would effectively look for any exceptional items, normalise EBITDA, produce analysis that effectively highlights what the business does, how it makes money, what is it's capital structure and how liquid they are.
On the sellside, not a huge amount. There will be some modelling (particularly if there's a debt advisory component), but the FDD advisors (big 4, A&M, etc.) will produce their report, and the bank's job is to read it and suggest clarifications, amendments, new content, and other changes. Banks do this in order to present the company in the best light (e.g. if there was a drop in revenue in one division and the FDD advisors (whose core competence is not selling companies) have butchered the explanation, suggest better wording). Of course, banks do not typically suggest outright changes to the numbers and usually trust management / the seller and FDD with the numbers.
On the buyside it can vary hugely on the client. I have worked with sponsors who will not let banks even look at the model (which is incredibly frustrating). I have also worked with clients who expect the banks to do a LOT. That includes building and holding a model (either building it group-up, or using a client's existing template, etc.), where the inputs will come from the FDD, as well other marketing materials and conversations with the client. It also includes reviewing the FDD and coming up with questions (anything from explaining reasonable changes in the business's operations and numbers that aren't well-explained), and making judgments (e.g. the reasonableness of Quality of Earnings as another user has pointed out).
There are other analyses and topics involving FDD that can come up (e.g. negotiating the EV-to-Equity bridge, etc.), but probably this goes beyond the Analyst level.
Hope this helps
[Comment Removed]
Oh I see, I misunderstood your question. The context is helpful. Firstly, I wouldn't use the term "FDD" then; FDD usually refers to something quite specific in an M&A process.
Honestly, I'd say that the financial models from these prep providers that you pay for are way overly-complex and varied in their scope for the vast majority of what you'll do as an Analyst. Most of the time I'd say the modelling, when we do modelling (you'll have plenty of other tasks as an Analyst), is more high-level and specific to a particular situation than doing 20-sheet financial models. Often (very often) you'll be using templates that exist rather than something you need to memorize or build from scratch.
However, two points (and I really want to emphasise this):
1) You will run into situations where you need to hold the pen on a heavy model or interact with ideas that aren't immediately obvious (for example, using the treasury stock method to calculate diluted shares outstanding), and it's very useful to be able to demonstrate a solid competency and get straight to work doing it right. You won't be fired for not know all the nuances of an accretion / dilution analysis while you're actually on the job, but it sure is the difference between top bucket and middle bucket (or lower which of course can lead to no bonus or dismissal).
2) Interviews. You'll get case studies. These might be 30 minute scratch LBOs or week-long models where you get to reference outside materials. The worst (in my opinion) is 3h or 5h models where you're kept isolated so can't reference outside materials, but still need to build something of decent competency. You need to know the basics and the more reps you have, the better.
Hope this is a little more helpful!
What kind of job? On the sell-side, buy-side, or Big4 within the transaction services team?
[Comment Removed]
Ah, the comment above described it perfectly. I could give more colour from the TS point of view, but now I see it's irrelevant here.
Mostly making sure that convertible shares are not accounted for twice, diluted shares are considered when doing comps, coffee is on the table for when the MD walks in etc
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