The Financial Fact Book as a key for success in M&A Transactions

A Financial Fact Book (“FFB”) plays an important role in a Mergers and Acquisitions (“M&A”) project. It is a comprehensive document containing essential financial data and analyses relevant to a potential investor. The primary goal of a FFB is to streamline the M&A process by summarizing relevant data and presenting it to potential buyers in a transparent way, mainly within complex target group structures. The FFB is also often shared with the investors in the early stage of an M&A process to receive more reliable indicative offers.

The FFB describes historical financial data, such as the development of financial performance and profitability (e.g., EBITDA), as well as the development of the balance sheet and cash flow derived from the annual financial statements. Complex group structures require the preparation of pro-forma consolidated financials, which are often unavailable and therefore also prepared by the FFB provider. 

The analysis of the financial performance is often complemented by additional details such as revenue analyses (e.g., by product groups, regions, top-customers), gross margin analyses (e.g., by product group, top-suppliers), analyses of personnel expenses (e.g., expenses per FTE) and a detailed description of the content and development of other operating expenses. 

Additional balance sheet analyses mainly focus on working capital development and identification of cash- and debt-items. 

Often, historical data is supplemented with a forecast and business plan. The FFB provides a brief overview and summarizes the underlying planning assumptions.

By presenting the financial data in an organized and consistent document, a FFB can ensure that the Due Diligence process is carried out effectively and helps to reduce the risk of misunderstandings or uncertainties. 

In contrast to a Vendor Due Diligence (“VDD”, comprising Financial, Legal, Tax and other reports), a FFB does not emphasize or highlight weaknesses of the target company. Although advisors who prepare a FFB or VDD are both engaged by the seller, the main difference lies in objectivity. While the FFB is prepared by the seller’s advisors, the VDD is conducted by an independent third party (usually an auditing firm).

Compared to VDDs, FFBs are more common in the German small and mid-cap segment. Investors usually engage their own Due Diligence advisors. Therefore, the assessment of the target’s strengths and weaknesses is subject to the Financial, Tax, Legal and other Due Diligence reports prepared for the investor. In that case the FFB can be used as a basis and guidance, hence simplifying the Due Diligence process significantly.