Dealing with M&A due diligence

September 1st 2022 | Posted by Phil Scott

Due diligence is an essential aspect of the mergers and acquisitions (M&A) process for FDs and CFOs. It enables a potential deal to be verified, investigated, and audited.

This is vital to providing assurance to the buyer and confirming the expectations of the seller.

As M&As increase in number, due diligence is being completed more widely. So, what does this entail and why is it so vital?

Why is due diligence so vital?

When you look at the areas addressed by due diligence, it’s clear why it’s so integral to the successful completion of the M&A process.

These areas include:

  • Verifying information provided during the deal.
  • Identifying potential problems with the deal.
  • Establishing the value of the deal by collecting valuable information.
  • Making sure the opportunity complies with relevant criteria.

Paying attention to these areas makes it more likely that the M&A deal will be completed successfully. Completing due diligence also confirms the expectations of both the buyer and the seller and assists with the management of risk.

Activities in the due diligence process

There are several general questions that usually form part of the due diligence process. Industry-specific questions can also be added.

The questions fall into a number of different areas:

  • Understanding the target company such as why is it being sold and what business plans and long-term goals are in place.
  • In-depth financial analysis of the target company including what the financial statements say about performance and potential.
  • Reviewing the technology and intellectual property of the target company including insights into technology infrastructure, patents, and trademarks.
  • Determining if the company to be acquired is a good fit for the buying organisation in terms of strategy, products, and services.
  • Developing knowledge of the customer base of the target organisation including potential risks and opportunities.
  • Understanding workforce and management matters including corporate structure, incentives, and benefits.
  • Determining any current or potential legal issues.
  • Analysing the information technology situation in the target company including capacity and maintenance costs.
  • Reviewing the target organisation’s corporate records.
  • Determining the CSR reputation of the target company.
  • Examining the production capabilities of the target business including details of subcontractors, suppliers, and materials.
  • Collating information about the marketing strategies of the target organisation including agreements and franchises that are already in place.

This is not an exhaustive list of areas to be questioned before the completion of an M&A deal, but it does form the basis of work that needs to be done before any deal is agreed.

Completing this work is essential for companies and investors to have the necessary understanding of what the deal means for them. This helps them to determine whether the acquisition is a good fit with the structure of the existing business. It also provides an insight into potential risks so that they can be assessed, and mitigation plans can be put in place.

Only when due diligence is completed can all parties be assured that completing the M&A process is in their best interests.

If you want to find out more about this topic, join our FD network with in-depth videos on M&D from experienced Finance Directors and CFOs– it’s free.