An investigation: How well does ChatGPT understand the benefits of Financial Due Diligence?

1) Increased Confidence in the Transaction: By conducting financial due diligence, you can gain a greater understanding of the target company's financial position, including its assets, liabilities, revenue, and expenses. This information can help you make a more informed decision about the transaction, giving you increased confidence in your investment.

A valid point, if a little vague. It could be improved by going into detail about any potential issues which could arise. These could include fundamental problems around revenue recognition or working capital cycle. 7/10

2) Identification of Potential Risks: Financial due diligence can also help identify potential risks associated with the transaction. For example, it can uncover any outstanding legal disputes or liabilities that may impact the value of the target company. This knowledge can help you negotiate better terms for the deal and plan for potential contingencies.

Again, another valid point, a key objective of financial due diligence is to provide comfort over the completeness of liabilities to ensure there is less risk of a nasty surprise once a transaction has completed. 9/10

3) Increased Negotiating Power: With the information gathered during financial due diligence, you may have more leverage during negotiations with the target company. You may be able to negotiate better terms for the transaction or identify areas where cost savings can be achieved.

Some repetition of the previous point, which did mention using knowledge of risks to negotiate a better deal. That being said, this is another key benefit of carrying out due diligence, so there is no harm in reiterating it. On average, we would expect the cost of a financial due diligence process to more than pay for itself through adjustments identified to get from Enterprise to Equity value. 7/10

4) Improved Understanding of the Industry: Conducting financial due diligence on a target company can also give you a better understanding of the industry in which it operates. This can help you identify trends and opportunities in the market, as well as potential threats to the company's future growth.

A slightly lesser point as this is arguably something which falls more into the remit of commercial due diligence. However, it is still possible to carry out financial due diligence with a commercial angle, by benchmarking the target company performance against competitors for instance. 6/10

5) Reduced post-transaction surprises: Financial due diligence also allows you to identify any potential issues with the target company that may only surface after the transaction is complete. By identifying these issues in advance, you can develop plans to address them and minimize the negative impact on your investment. Overall, financial due diligence is a critical step in the process of evaluating a major financial transaction. It can help you make more informed decisions, identify potential risks and opportunities, and ultimately, maximize the value of your investment.

Another slightly weaker point with this arguably covered already by points 1 and 2. It also appears to have written the overall conclusion as part of this point rather than splitting this out into a separate paragraph. 6/10

It is important to note that this is not a complete list of all the benefits and it is always advisable to seek professional advice in order to make the most out of any due diligence process. Additionally, it's also a good idea to consider other types of due diligence like operational, legal and compliance.

I was very impressed that the Chatbot recognised the need to include a disclaimer 9/10

My conclusion

It is very impressive that in less than a minute, ChatGPT is able to put together a solid article. All the points raised were broadly accurate, with the only criticism being that there was some repetition and a few vague points which could be improved through added detail. It certainly is a very useful tool which will likely massively speed up the article writing process (this article only took me 15 minutes to put together!). However, for truly useful detailed information, I don’t think human intervention is done yet.

Our Corporate Finance team provide due diligence services across a number of sectors, so if you have any questions about any of the topics discussed in this article, speak to us.