A Guide to M&A Due Diligence

05 May 2017 Amelia Henderson Best practices

Merger and Acquisition (M&A) due diligence is a vital process a company undertakes when it is considering the purchase of another business, or when two businesses intend to merge into one. M&A due diligence is conducted to help the buyer determine whether to proceed with the proposed deal, and to establish a price for the acquisition.

It is important that the buyer carries out thorough M&A due diligence to identify any risks in acquiring the target company, and establish whether there are any financial or legal concerns the buyer should be aware of.

The M&A Due Diligence Process

M&A due diligence an extremely thorough process that requires insight into multiple key business functions. As a result, it is a long process that can often last for several months.

  1. The buyer must prepare a team to conduct the due diligence process. As M&A due diligence is an exhaustive and complicated process, the buyer will require financial and legal experts, as well as team members with specialist knowledge of all the key functions. For this reason, the buying company may opt to ask a third party to conduct the due diligence on their behalf.
  2. The team must write a detailed checklist and decide on a time scale for the whole process.
  3. Following this, a confidentiality agreement will be signed, and the due diligence team will begin requesting the required information from the target company.
  4. Key management figures from both the buyer and target companies should then arrange a series of meetings to discuss the process and data requirements. These meetings also provide an opportunity for both businesses to assess their compatibility.
  5. The buyer must continue to gather all necessary information on the operational assets, financial health, legal matters and strategic position of the target company.
  6. The buyer must then review all information and ensure they are able to answer key questions concerning the risks involved in acquiring the target company.
  7. If the buyer cannot answer these questions from the information they have gathered, they must then request additional information from the target company.
  8. Once the buyer is satisfied and confident enough to proceed, the final step is for the buyer to write a purchase agreement and send it over to the target company to approve and sign.

What are the benefits of conducting M&A due diligence?

  • The buyer is able to adjust their expectations as they get to know the target company in more detail, and form a more complete view of how the acquisition or integration will play out. This also helps to inform the strategy for negotiations.
  • Another benefit of M&A due diligence is that it helps the buyer understand any potential risks involved with acquiring the target company, enabling them to protect themselves and minimize the likelihood of encountering unexpected legal or financial risks.
  • Carrying out thorough due diligence allows the buyer to plan for the integration of the target company and put practical steps in place to ensure the process runs smoothly.
  • The M&A due diligence process requires a considerable amount of communication between the buyer and the target company. One of the benefits of this is that it allows both parties to build working relationships and develop a good sense of rapport before the acquisition or merger goes ahead.

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M&A Due Diligence Checklist

  • Corporate documentation – including incorporation documents and minutes from all official board/shareholder meetings.
  • Financial documentation and data – including tax documentation, bank statements, financial predictions, company debts and outgoings, budgets and business plan.
  • Intellectual property documentation – including intellectual property protection, information on copyrighted products, and technology licenses.
  • Information on customers – including customer base and customer revenue. The buyer needs to consider whether there are there likely to be issues maintaining this customer base following the acquisition or merger.
  • Material contracts – including loans, credit agreements, leases and employee agreements.
  • Employment policy and management processes – including a summary of employee benefits, a copy of employment policy and a copy of actuarial reports.
  • Historic or current legal issues – including copies of all legal filings.
  • Employees and departments – including a full list of directors, employees, partnerships, subsidiaries and parent companies, an outline of the corporate structure of the company, and a list of departments and the roles within each.
  • Property – including list of properties owned by the business and outstanding leases.
  • Acquisition/Merger agreements – all documentation regarding the potential acquisition or merger, and strategic considerations of how the target company will be integrated.

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How DueDil can help

From due diligence to deal prospecting, DueDil helps businesses make data-informed decisions.

DueDil combines comprehensive sources of company information and an intuitive set of features that allow any team to uncover opportunities and understand risks. Unlike traditional information suppliers, DueDil provides a unified platform for teams across a business to contextualise and navigate the relationships between sets of data.

DueDil takes live data from a wide range of authoritative sources, combines it and presents it clearly. On top of this foundation is an intuitive set of features that allow users to search for, segment, benchmark, monitor and export company information.

To find out how your business can enhance its due diligence processes, get started with DueDil today.