There are a number of factors to be considered during mergers and acquisitions. It is a complicated process and hence it needs to be structured properly. The acquirer needs to be aware of what he is getting into and has to be assured that the deal fulfills his expectations. To achieve this the acquirer/ buyer usually opts for due diligence by a third party which substantially reduces any risks and gives him an assurance of the deal he is entering into. On the other hand, a seller may conduct due diligence on his own accord in order to derive the fair market value of his company and also gain the trust and confidence of the buyer.
Thus, it provides a number of advantages like:
- Identifying any potential defects in the deal or investment
- Enables collection and verification of data and information pertaining to the valuation of the deal
- Identifies any substantial risks and business threats
- Helps in either making a good investment decision or avoiding a bad one.
Mergers and acquisitions involve a huge deal of capital; hence, a thorough examination of various business-related factors is of prime importance. The due diligence involves audit, investigation, and verification of the relevant information pertaining to the merger-acquisition deal.
Due diligence in mergers and acquisitions majorly involves the following:
The financial due-diligence involves critical assessment and in-depth review of financial statements, cash flows, assets, and liabilities. This helps in evaluating the financial performance and condition of the selling company. The acquirer gets a correct idea about the outstanding debts, capital expenditure, and investments. It helps in making projections and estimates of future cash flow. And other financial risks that the company may face in the future. It also understands the accounting process followed by the company. And gives a heads up about the system in place and the required transition after the deal. It also throws light on tax compliance including any tax liabilities, tax audit queries, unused tax credits, notices, and tax penalties if any.
This is a important due-diligence that looks at all the legal contracts that the company has entered into. And reviews all the terms and conditions of various contracts including operating contracts, finance and loan agreements, any partnership or joint venture agreements, licensing contracts, any guarantees, etc. It also reviews the memorandum and articles of association, minutes of the meeting, share certificates issued, etc. It also examines the corporate governance policy. And the intellectual property rights of the company that determines the value addition that can be done to give the acquirer an edge over others. It investigates any potential legal liabilities and helps the acquirer company to make a detailed risk assessment of its future investment in the seller’s company.
Customer due-diligence mainly focuses on understanding the customer base of the seller’s company. It reviews the contracts and the payment terms of various customers and product/ service warranty conditions. A careful analysis is done of various forms or surveys that reflect customer satisfaction. It helps the acquirer to have a fair idea of the type of customers that it would have to interact with. And also gives it a picture of the market share and the target customers that would be the source of revenue if the deal goes through. The bad and doubtful debts are also studied to understand why and how the company is dealing with such customers. All customer agreements and credit policies are carefully examined to understand how efficiently the accounts receivable are handled.
Employees/ Human Resources due-diligence:
This due diligence covers the entire workforce, right from workers, employees up to the management. It helps to understand the working culture of the company. Thus, helps to overcome any risks associated with key personnel of the company. Since employees are the real assets of the company, it is very important to have an idea of the total number of present employees. And go through all employee-related documents including their contracts, wages, salaries, compensation, bonuses, etc. Employees’ due-diligence also looks into any employee disputes or grievances that are pending. And can have any potential impact in the future.
System and technology due-diligence:
Every company uses technology and systems to record its operations and transactions. System audit assesses the entire process cycle and understands how the system and technology are structured used by the company. If the current system is not efficient then the acquirer would have to spend a lot of money to upgrade the systems. That would be a very costly affair. Hence, system due-diligence pays in-depth attention to technical issues. This includes understanding the data security, system licenses terms and conditions, and data backup methods. It also keeps an eye on any misuse of the systems and software as well as any lawsuits on intellectual properties. Understanding the technology and systems used by the seller company assures the acquirer that he is not investing in low-quality software. And gives him a heads-up of the amount of investment that would be required to update the company with the latest and updated system for various business-related activities.
Along with the above-mentioned due diligence, companies can also conduct due diligence in areas of administration, regulatory, operational, and environment- based on their requirement and to assess the company’s capabilities in areas that may be of importance to the acquirer. Conducting due diligence by employing the right service provider helps companies to decide the viability of the deal.
At your Service:
If you are about to get into a merger acquisition deal and are looking for a reliable third party who can conduct due diligence, then Diligen is your go-to service provider. Diligen has a specialized team of financial experts, legal and tax consultants, and IT professionals who have a wide range of experience in conducting due diligence across various industries. This helps them to conduct due diligence in an orderly manner.
The team at Diligen understands their client’s business needs and structures the due diligence exercise to give the client a true and fair picture of the deal that they are entering into. Diligen not only provides you with the best professional services but also ensures that it is done in the most cost-effective manner.