Due diligence is one of the most important aspects of a Merger and Acquisition Deal. In the M&A process, due diligence allows the buyer to scrutinize, verify and confirm pertinent information about the seller. Conducting comprehensive industry-specific due diligence is a mission-critical process of validating a target’s financial position, determining potential risks and threats, and identifying potential synergies between a buyer and seller. Overlook something in this could have disastrous ramifications. Mergers and acquisitions (M&A) is an approximate $3.6 trillion event that alters the long-term outlook of industries, companies, and even individual careers. Whether it is an acquisition, carve-out, integration or divestiture, obtaining a 360-degree view of a firm — financial, operational, tax, IT, human resources, cybersecurity, compliance and regulatory equips the buyer better to make an informed decision and close the deal with a sense of certainty.
What is the importance of Due Diligence?
Due Diligence allows the deal makers to:
1. Understand the Opportunity at hand: It enables the team to scrutinize the investment opportunity against the investment criteria and understand if the opportunity fits and has the potential to fulfill that criteria.
2. Check All Facts: It allows one to confirm and verify information that was brought up during the deal. It is essential to assess the legal and financial facts of the transaction. You need to be aware about the EBITDA and have the adjustments to EBITDA appropriately calculated? This is particularly important if the buyer is obtaining debt financing.
3. Identification of Risks: It enables identifying risks and potential defects in the investment opportunity beforehand and mitigating them to avoid a bad business transaction.
4. Review the liabilities and contracts: Reviewing the material contracts although time consuming is an absolutely critical process. It enables one to ascertain liabilities that may be deal breakers for you. The categories of contracts that are crucial to review include – loans, leases, credit agreements, supplier contracts, agreement of partnership or joint ventures, past acquisition agreements, license and franchise agreements, sales agency and advertising contracts, etc.
5. Overview of All Litigations: You need to have an overview of the pending, threatened or settled litigation involving the seller. This process should be undertaken very seriously and must involve – pending litigation, settled litigations and the terms of settlement, claims threatened against the seller and matters in arbitration or mediation, etc. This will help you understand what business you are going to purchase and how it will affect you.
Types of Due Diligence in Mergers and Acquisitions:
A potential business deal involves different types of due diligence in mergers and acquisitions.
Financial due diligence: It allows you to scrutinize the finances of the targeted business. This includes revenue analysis, review of business operations, analysis of gross profit margin, working capital and debt overview, review of all financial statements, etc. All this helps you to identifying the key strengths of the business while helping you realize and brings to your notice the potential deal breakers.
Legal Due Diligence: It lets you evaluate the target company from the legal perspective by helping you identifying potential legal risks and determine what future potential areas of conflict could be.
Operational Due Diligence: Operational failures can harm the of the entire company and can be ensured via: HR, IT, manufacturing and production management, marketing review, warehouse and supply chain management. Hence it’s important to assess the potential risks and mitigate the risks of operations.
IT and Technology Due Diligence: Analyzing the company’s technological capabilities will help you immensely. During managing any business, IT and software play a major role. It is crucial to identify and understand possible compatibility difficulties arising from a target company’s use of incompatible software.
ESG Due Diligence: Environmental, social and corporate governance (ESG) is also playing an increasingly prominent role in an M&A deal making. While ESG’s importance is evolving differently around the world, many deal teams are under pressure to obtain and review massive amounts of information to perform their duties.
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