In any business, mergers and acquisitions represent a milestone in a company’s life cycle which leads to changes in marketing position, strategy and operations. The success of any large transaction not only relies on good communication and price agreement, but it also relies on due diligence. In this article, we’ll go into detail of the overall role of due diligence in the business scene and how it plays a bigger role when it comes to making a decision for mergers and acquisitions.
Understanding Due Diligence
Due diligence, in relation to business, is the evaluation and investigation of potential mergers and acquisitions which require all material to be fact checked and confirmed prior to any agreement. When it comes to M&As, it combines a thorough analysis of the target company’s finances, legal standing, operations, and overall market position.
Components of Due Diligence
Due diligence encompasses several different components which focus on different aspects of a target company. These include:
1. Finances
The background check involves review of the following areas of a target company’s financial status.
- Revenue and profitability
- Debt obligations
- Financial projections
- Income statements
- Cash flow statements
- Tax records
- Balance sheets
By understanding the finances involved you’ll know the overall risks and whether the deal will cost you more than originally thought.
2. Operations
This area focuses on the overall operational aspect of the target company which can include the business model, management, staff, and supply chain and processes. This allows for analysis of all key processes and the capacity of the overall team. In doing this it can tell you whether the business is currently working at full capacity and whether you’ll have to spend more money on hiring more skilled people to keep up with the workload.
3. Legal
Legal due diligence works to uncover any possible legal issues which could arise before or after the acquisition. These can include:
- Whether contracts and agreements are legit and abide by the law.
- Identifying if there’s any litigation risk, regulatory action or disputes.
- Analyzing intellectual property and understanding any trademarks, patents and property rights.
Businesses shouldn’t sign any agreements until all legal due diligence has been viewed and researched correctly.
4. Market
Market due diligence encompasses researching the competitive landscape and market position of the target company. This can look like.
- The overall market trends, the growth potential and the market share the company holds.
- The evaluation of the target customers, demographics and loyalty.
- Analysis of the strengths and weaknesses of competitors and how the target company competes against the competition
Market analysis is important to understand if the acquisition has the potential to thrive in the current market.
The Role of Due Diligence in Mergers and Acquisitions
In a merger and acquisition deal, due diligence is especially important for the following reasons.
- Risk identification: The primary role of due diligence is to identify key risks associated with the acquisition.
- Negotiating leverage: After due diligence has been conducted, it helps to offer negotiation leverage especially when issues arise in the reports. It allows the buyers to then request additional adjustments to the price or other terms before agreeing to the merger.
- Valuation accuracy: Due diligence also helps when it comes to finding out the real value of the target company. It provides insight into the cost of running the business, what it’s worth, and the costs involved so the buyer can make an informed decision.
When you need to complete a due diligence check on a target company it’s always good to hire a professional service like Diligence International Group to do it for you so you know the job will be done right the first time.
Endnote
When it comes to due diligence in mergers and acquisitions, it’s an important step to understand whether the business deal is a good one. By hiring professionals to help with due diligence you have the ability to buy a target company while minimizing as much risk as possible.