If you’re considering a merger or acquisition, then due diligence is your opportunity to scrutinise the target business. It’s important that you undertake detailed financial and legal due diligence, but there are also other areas that the due diligence process should cover including operational and commercial risk areas.

Undertaking a thorough and complete due diligence exercise offers many benefits.

What should due diligence cover?

Financial due diligence: A typical financial due diligence review will look at both the past financial performance and the forecast financial performance for the target company within its current business plan. Financial due diligence will look at whether all these financials give a true and fair view of the target business and therefore whether the price you are paying is justified.

Legal due diligence: This generally covers an investigation into areas such as the corporate and legal structure, commercial contracts, employment contracts, intellectual property, information systems, environmental, health and safety, regulatory compliance, competition, litigation, tax and property.

Operational due diligence: This will look at areas such as the strength and weaknesses of the company’s operations including people and organisation, IT and systems, sales, marketing, supply chain, logistics, processes and future potential.

One area of due diligence that is often missed or not considered in enough detail is around cultural fit. Sometimes both sides focus on the due diligence areas above and not enough on the all-important cultural fit between both businesses and their customers.

The 10 benefits of good due diligence are:

• Helps to identify, and manage, risk areas.
• Could allow you to negotiate a better deal.
• Allows you to decide if the target company is the right fit.
• Provides expert third party insight into the target company.
• Provides transparency for both parties in the deal.
• Can improve relationships between the two companies.
• Can save you valuable time later in the deal.
• Gives clarity of whether the financials of the business are a true and fair view.
• Provides an overall picture of the company’s operations.
• Can ensure a stronger deal and smoother transaction.

Summary

When done properly a full due diligence review will provide an acquirer with valuable information to support the proposed acquisition and will identify early in the potential acquisition process the extent of any risks in the target business, any issues that need to be addressed, potential costs and impact these points have on value.

In recent years there have been many examples where due diligence has highlighted a number of risks, potential liabilities or a lack of ethos between companies which made the acquisition untenable. The cost of due diligence is a small price to pay as the benefits far outweigh the impact, and cost, of making a bad acquisition.

For this reason, it’s essential that sufficient time and budget is allocated to the due diligence process. It can save you substantial money, time and issues further down the line.

If you’d like more information or need help with due diligence for a potential merger or acquisition, contact us.