Managing due diligence in company acquisitions

The general complexity of mergers and acquisitions and the complicated nature of many modern corporate structures make thorough due diligence a crucial part of an M&A transaction.

Detailed checks on a target company allow an understanding of a prospective acquisition and minimise the risks of acquiring it. The purchaser gains perspective on how to integrate the acquired company into their own business or their group of companies. Due diligence also offers insight into how the business has been managed thus far.

As far as the seller is concerned, the due diligence process can offer protection from future warranty claims. This is because full disclosure of the information needed by an acquirer to move forward with a deal may make it more difficult for them to claim once it is complete.

So how can due diligence be managed effectively in a company acquisition?

How to manage due diligence in company acquisitions?

Hire experienced professional advisors

A professional assessment of the target company’s financial, legal, and reputational position provides a detailed picture of the commercial viability of the proposed transaction, and wisdom in proceeding.

In addition to confirming information that has already been provided by the seller, due diligence typically offers clarity on the positive elements of a business, which can consolidate the acquirer’s decision to move forward with a deal.

On the other hand, the process can also provide important warning signs, which could potentially lead to renegotiation of the price and terms or even abandonment of the deal altogether.

Use a range of due diligence tools

Using a range of due diligence methods mitigates the risks when conducting mergers and acquisitions and increases the chances of a successful outcome for all parties. The due diligence process in company acquisitions might typically include investigations into an individual’s or company’s reputation or their past financial/business dealings.

Determining whether the proposition is sound financially and legally, and that there are no reputational issues to negatively impact the acquiring business in the future, are fundamental to effective due diligence.

Obtain detailed due diligence reports

Thorough reporting helps the acquirer determine the value of the target company - whether the deal is commercially beneficial for them to pursue, and also if it is advisable from a reputational perspective.

Robust due diligence measures expose the risks and opportunities inherent in company acquisitions. They are a crucial part of the M&A process, but their reliability can depend on the acquirer undertaking a variety of measures.

The timeline to effectively manage due diligence in company acquisitions

Plan and organise due diligence

Early preparation and planning for due diligence eases the information-gathering process and provides a blueprint for the protocols to be used. Professional financial and legal advisors play a key part, as do business transfer agents or business brokers who are involved in the proposed transaction.

Determine due diligence methods

Depending on the complexity of the deal and the target company, undertaking a range of due diligence methods may be advisable. In addition to the standard financial and legal checks, background screening could safeguard the acquiring company’s reputation and maintain security.

Background screening might include court records and criminal record checks on key officers, for example, to identify instances of litigation or criminal activity. A complex business structure may also make corporate records and company ownership checks advisable.

A check on company records would confirm whether or not the business being acquired is genuine. From a negative standpoint, checking company ownership might reveal associations with people or companies that threaten the merger’s future success.

Due diligence reports and assessment

Extensive reporting of the due diligence findings presents a detailed view of the target business and allows the acquirer to make an informed and confident decision on whether to proceed.

The information contained in a due diligence report may be derived from several sources, including questionnaires, site visits, and background checks, and relays key intelligence pre-acquisition. A site visit report, for instance, confirms that the company operates from the physical location they claim.

An acquiring company may also benefit from documentary proof that the company owns the assets they state. In this instance, evidence of ownership can be included in an asset tracing report.

Carefully planned due diligence eases the company acquisition process and mitigates some of the risks for the acquirer. It provides in-depth information about their investment as well as reassurance that value can be added once the deal is complete.