Due Diligence in Merger & Acquisition
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In today’s time, merger and acquisition of a company requires proper due diligence.
Before entering into an agreement, the investor must know about the financial health of the target company.
Due diligence Services are the detailed investigation and verification of potential deals to confirm all the relevant financial information related to it.
However, due diligence is the boundless process in M&A, giving an assurance to the investors about what they are buying.
Due Diligence in Mergers and Acquisitions
Due diligence in m&a is a detailed investigation and verification of financial records, business opportunity or deal to to verify that the information provided by the targeted compay is genuine.
This process is initiated to target any risk involved in the proposed transaction.
Due Diligence Checklist in merger & acquisition
1. Understand the Business - You need to know about the business of the target company, and whether it is financially healthy. Therefore, the process of due diligence in mergers and acquisitions helps the investor to have a better understanding of the target company’s business.
2. Review of Tax Aspects- Due diligence process helps in ensuring that there are no unforeseen tax liabilities in the future date on a company.
3. Is the company's financials strong? - Crucial aspect of due diligence in M&A is to ascertain the financial health of a company. You can see the Income Statement, Balance Sheet, and Cash Flow Statement. During this process, the company’s profit can be evaluated, analyse the company’s debtor cycle etc.
4. Company Management - its imperative to know about the credentials of the management (top management & founders). It is very essential to know how strong the management of a company is. Therefore, due diligence process in M&A helps to know about company management.
Importance of Due Diligence in Merger & Acquisition
It becomes very critical for the investor/ buyer to know about the financial affairs of the company and the legal health of the target company.
Therefore, in mergers & acquisitions, due diligence plays a major role in determining any risk attached to the target company.
Based on due diligence the investor/buyer can measure the effectiveness of corporate governance.
To make up their mind about M&A agreement due diligence is important.
During the process of due diligence, shortcomings in a target company are identified and solutions to it are also provided which helps in effective decision making.
Types of due diligence in Merger & Acquisition
1. Financial due diligence: Financial due diligence is the exhaustive understanding of company financials. It is one of the most important types of due diligence in mergers and acquisitions. A key area of financial due diligence is to review the financial statements, assets, debts and projections to whether it’s true and correct.
2. Legal due diligence: It is an essential part of the process of due diligence in mergers and acquisitions. Legal due diligence typically includes examination and review of the following documents:
A. Copy of Memorandum of Association
B. Copy of Article of Association
C. Minutes of Board meetings for the past three years
D. Copy of share certificate
E. Partnership Agreement
F. Licence Agreement
3. Administrative due diligence: Administrative due diligence involves admin- related items. Any operational risk involved should be addressed.
4. Asset due diligence: This process of due diligence in merger and acquisition is to have the details about the fixed assets and their locations (Physical verification can be done, if possible). All the agreements of equipment and schedule of sale or purchase is to be reviewed.
5. Human Resource due diligence: Human Resource due diligence is an extensive and most underestimated type of due diligence in merger and acquisition. It covers the whole gamut of the workplace and all the documents regarding employees and management.
6. Environment due diligence: Environment Protection Agency (EPA) sets the regulations and standards for this purpose. Therefore, EPA is the one who determines which type of assessment is to be done. In this part of the process, merger and acquisition documents are to be reviewed, like environmental permits, licence, and copies of notice from EPA.
7. Taxe due diligence: Tax due diligence in merger and acquisition means examining and reviewing the tax liabilities, if any due, of the target company. It investigates unrecognised tax or any other tax-related issues. Making any kind of mistake can lead to heavy penalties from the government.
8. Intellectual Property due diligence: Intellectual property is an intangible asset which almost every company has, to monetize or construct their business. Few items to be looked at in the due diligence process during merger and acquisition, like copy of patents, copyright, trademark etc.
9. Customer due diligence: In merger and acquisition processes customer due diligence always includes a close look at the company’s customer base. It involves examination and analysis of customer satisfaction score, service agreements etc..
Objectives of Due Diligence in M&A Transactions
1. Conducting SWOT analysis to identify the strength and weakness of the target company.
2. Objective is to make an investor/ buyer make the right decision about the investment.
3. To collect all the material information about the target company.
4. To understand the financial health of the target company.
It is done to have an exhaustive understanding about the financial statements of a company, so the investor can make intelligible decisions, whether to invest in the company or not.
Soft due diligence is concerned with the people within the business and the customer base of a company.
Due Diligence helps both the parties, the buyer and seller in business acquisition. It helps the investor to make wise decisions in closing the deal. This information helps to learn about the current situation of the existing company, nature of the deal.
The costs are incurred by both the parties, the buyer and seller. They pay for their own team of investment bankers, accountants, attorneys and other consulting personnel. The due diligence cost highly depends on the duration of the process.