Importance of Due Diligence

Going forward with an M&A (merger or acquisition) is simply the hardest and biggest transaction for any company. No company would want to move forward without properly analyzing the target asset.

By undergoing due diligence, a company can go forward with these transactions while making informed decisions based on thorough analysis. This process highlights all the weak and strong points of the target company that the buyer company wasn’t previously aware of.

How to Conduct Due Diligence?

Conducting due diligence means thoroughly analyzing a commercial business before your company decides to buy it. No two M&A deals are the same. This is why due diligence differs based on the type of transaction.

However, a few steps remain the same in each transaction. The following steps are what you will perform to conduct due diligence on the target company:

1.   Goals Evaluation

The corporate structure is based on goals. Whenever there’s a new project, the first step is to evaluate future goals. While considering goals, the company can determine the resources required to move forward with the business strategy. This step requires asking thoughtful questions regarding what your company seeks from the due diligence.

2.   Analyzing Business Financials

We can't skip this step. This is the main part of every due diligence. Analyzing business financials is an exhaustive audit. This step checks the legitimacy of the documents the target company shares in the CIM (Confidentiality Information Memorandum).

Moreover, this step also paints a clear picture of the target company’s assets health, evaluates the overall financial performance and asset stability, and determines any cautions or warnings. Some of the business financials inspected in this step are:

●      Inventory schedules

●      Balance sheets

●      Income statements

●      Future forecast and projections

●      Stock history and options

●      Tax forms and other documents

●      Profit, revenue, and growth trends

●      Short or long-term debts

●      Valuation of assets when compared to competitors according to industry benchmarks.

3.   Documents’ Thorough Inspection

This due diligence step involves the buyer and the seller. During this step, the buyer directly communicates with the seller, asks for the essential documents to audit, goes on business site visits, and conducts necessary interviews or surveys with the seller.

Quick involvement and responsiveness at every step of the due diligence process will make the buying process smoother and quicker. The buyer’s lack of communication or responsiveness may result in a tedious experience for the buyer.

After collecting all the essential information, the buyer analyzes this information to ensure the business strategies and best practices align with the process. It also ensures proper legal and environmental compliances are met.

Overall, during this step, the buyer gains better insights into the target company as a whole and deduces an overall long-term company value.

4.   Analyzing Business Plan and Model of the Company

In this step, the buyer company analyzes the target company’s business plans and model to check if these two aspects will smoothly integrate with the buyer’s company or not. This critical step decides if any major changes are required in the existing or newly developed business plans and model or not.

5.   Final Offering

After every essential information is gathered, the buyer company’s teams sit together to discuss their findings. Business analysts analyze all the information to perform different valuation methods. This defines what the buyer company wants to offer as the final deal.

6.   Risk Management

Risk management involves carefully and comprehensively analyzing the target company to forecast risks and trends related to the business transaction.

With these steps, you can also conduct your company's due diligence.

Due Diligence Requirements to Consider

As we said before, no two M&A transactions are the same. They require different documents for thorough analysis. A general due diligence management folder contains the following essential documents:

●      Property and equipment

●      Transaction documents

●      Undergone contracts and agreements

●      Corporate documents

●      Procurement documents

●      Customers, marketing, and sales

●      Environmental compliances

●      Intellectual property

●      Tax

●      Legal, regulatory, and litigation

●      Financial

●      HR and employees

●      Operations

●      Insurance

●      Information technology

●      And other documents!

How Any CEO Can Calculate Due Diligence For His/her Private Company

Not every company is publicly held. Buying a privately held company and performing due diligence is even more complex. Private companies are not traded conventionally or auctioned on the stock market.

To make the due diligence process easier for a private company, the following are some of the best practices to perform:

●      Determine your company’s financial situation. Before looking for companies to buy, define your company’s financial condition. Does your company even have enough resources and funds to perform the transaction? What if the transaction fails? Can the company bounce back? If not, it’s best not to go for such a transaction.

●      Financial statements and accounting procedures. Privately held companies don’t have to follow strict regulations or regularly undergo audits. They have different and unusual cash-basis and accounting procedures and practices.

●      Size of the company. Private companies are typically smaller than public companies. This means they have fewer employers, office space, and smaller revenues.

●      Legal considerations. The buyer always wants a smooth due diligence process. You wouldn’t want to run into any legal trouble. So, check the company for tax compliance, previous or outstanding lawsuits, and overall compliance to applicable jurisdictions.

●      HR practices. Human Resources practices are vital during the due diligence process. Smaller, newly made companies may not have proper HR processes. Check if the company has undergone harassment charges, questionable terminations, hiring practices, and existing workplace policies.

●      Valuation. Valuation techniques for private and public companies are the same. However, you will have to check and adjust according to the lack of liquidity of the private company and its publicly available market caps.

●      Overall business. Do you believe in the company? Do their mission and vision align with your company’s? Do you feel this transaction will turn out successful?