Mergers and acquisitions (M&A) come with various challenges before they can be concluded successfully. A business may have a strategic reason to proceed with an M&A. They may want to achieve economies of scale, diversify their products, expand the company, or something else.
No matter the reason for considering a merger or acquisition, not every transaction succeeds. Some M&As fail to achieve their goal because of circumstances outside their control. However, many problems and failures can be avoided or minimized by doing due diligence. Thorough research is critical whether the M&A is a small deal with limited participants or a large deal with multiple parties involved.
What Is Due Diligence?
Due diligence involves thoroughly verifying a potential merger or acquisition opportunity. This verification process serves as a risk assessment for the buyer, making the deal more likely to succeed.
During the due diligence process, the buyer investigates the investment opportunity, confirming the pertinent details of the company. An audit is also conducted, which gives a financial analysis of the business’s performance and standing.
Due diligence must be completed before you close the deal so you know you’re getting what you signed up for. After the paperwork is signed, you won’t be able to change your mind.
Different Types of Due Diligence
Due diligence involves reviewing and verifying the entirety of the new business investment opportunity. Yet, it’s more manageable to do so by looking at the various types of due diligence, which are as follows:
Legal Assessment
Legal due diligence analyzes the different legal contracts, legal liabilities, and licensing aspects. This could include reviewing open legal issues, reviewing current contracts, and investigating regulatory issues.
Financial Review
Understanding the company’s financial performance is key to determining if the M&A is viable. Critical to this analysis is whether the company’s financial numbers are current, accurate, and sustainable.
Tax information is a vital piece of information that needs to be reviewed, too.
Commercial Due Diligence
During the commercial review process, a buyer analyzes the commercial aspects of the target company. The corporate strategy during commercial review is to discover how the company’s brand is positioned in the market and what its future evolution looks like.
Cultural Aspects
Corporate culture is just as important in an M&A as other factors. The target company should align with the new buyer’s values, goals, and branding. The compatibility of the two merging companies will make potential challenges during integration easier to overcome.
Why is Due Diligence Important in an M&A?
Thorough research is critical to avoid failure when the entities become one. Without this process prior to laying out the corporate strategy, there is a greater likelihood of problems down the road. This process allows stakeholders to understand the businesses’ potential scalability once the merger/acquisition is completed. It also provides information about important synergies.
The process also identifies and mitigates internal or external risks in the potential merger. It’s better to know in advance if a future issue might arise based on the data collected. Everything is analyzed, considering what the new business scenario would look like. Assessing the various factors can provide more insight into the information you might find on the current balance sheet.
Finally, the due diligence process is necessary because it allows the buyer to verify all the information presented to them. This ensures the buyer doesn’t enter into a bad business transaction.
Due Diligence Checklist
Performing thorough research requires careful planning and follow-through. Some steps that will aid in successfully carrying it out include the following:
Evaluate the Finances
This step allows time to review all the financial information, such as historical financial statements, future projections, and other financial metrics. Additionally, tax and insurance documents should be examined.
Assess the Technology
During this phase, the buyer analyzes the seller’s technology, intellectual property, and processes regarding data privacy and cybersecurity.
Analyze the Target Company’s Customer Base
During this step, reviewers seek a deeper understanding of the potential customers to determine if profitability is viable.
Determine if a Good Cultural Fit Exists
In addition to assessing financial aspects, it’s important to understand whether the two cultures match. How will things work when the merger occurs? It helps to evaluate the company for current policies and other human resource matters.
Review Any Litigation
The buyer must know about any current litigation, how it might affect them, and the business’s financial status.
Find Out More About Business Acquisitions
Are you an insurance company looking to be acquired? Understand more about acquisition opportunities with us. At Confie, we have a record of positive M&A negotiations. For more information about Confie, contact us today or call us at (714) 252-2500.
