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Due Diligence for Successful M&A Deals

Mergers and acquisitions are a minefield. There are so many moving parts that it can be really difficult to wade your way through it and get to the good bit. The temptation then is to skip the due diligence stuff and head straight for the deal, but we would advise you not to do that. Like we said, mergers and acquisitions are a minefield. You need to be careful, or the whole thing will blow.

But what due diligence is important and how do you go about it. In this article, we hope we can help you get to the bottom of it.

What is due diligence?

First, it is important to know what due diligence is. Basically, it is the process of verification and investigation completed before a sale. It might include an audit to confirm all relevant facts and financial information is correct. It’s a way of making sure the companies align and your objectives are realistic.

Due diligence usually involves understanding a company’s obligations, such as debts, leases, distribution agreements, pending and potential lawsuits, long-term customer agreements, warranties, compensation agreements, employment contracts, and similar business components.

If you don’t know about these things and you buy or merge with another company, you might find yourself in trouble.

Why is due diligence important?

Completing your due diligence means you are more likely to have a successful deal than if you leave everything to chance. It will help you make an informed decision about which company to buy and enhance the quality of information you are giving to your decision makers.

Due diligence for buyers and sellers

Due diligence for the buyer means you can feel more comfortable about your expectations around the transaction.

But it isn’t all about the buyer. Sellers should let you do your due diligence because it will mean they need to do a rigorous financial examination, which will reassure them that they are getting fair market value.

Good companies will prepare due diligence reports themselves prior to potential transactions.

The process of due diligence

A proper due diligence process will take several weeks to several months to complete, so make sure you factor that timescale into your M&A.

You must first gather a team that is responsible for conducting the due diligence. This should include legal and financial experts, preferably those with experience of these types of deals. Your team should be made up of investors, accountants, lawyers, personal consultants, and possibly other service providers.

Once your team is assembled, you need to gather important documents, checking them off a list developed by the due diligence team. You’ll give the seller a timescale for delivery and you’ll mutually sign a confidentiality agreement, so that they feel safe giving you the documents.

The type of documentation you will need depends on the type of business and its size, but your dedicated team of experts will have a better idea of what you require. At the very least, you will need corporate records, IP contracts, stockholder information and a history of any litigation taken against the company. You might also want to consider requesting information about insurances and leases.

There might be meetings to discuss the process and the documents you require, in which both parties will get a better idea of whether or not the deal is really negotiable. Relationship building will happen here, and that is important.

Due diligence will give you a better understanding of your new company’s overall health.

Once the information is reviewed, you can ask any questions and address any concerns. Your due diligence team will look for red flags and make you aware of any possible issues with the deal. They’ll then let you know if they think the deal is viable or not.

Finally, your due diligence team will pull together a report you can use to form a purchase agreement, which will highlight any problems they discovered. A final assessment of the deal will then be presented.

You might need help

More mergers and acquisitions fail than succeed, so it is really important you get this part of your deal right. It is better to jump in and know exactly what is happening than go in blind and end up wasting time and money on a deal that won’t work. Worse, you might end up buying a company that has a lot of issues.

Yorkshire Change can help. Our team facilitates huge changes within organisations and helps make them seamless. Our experts will help you pull together your due diligence team and make sure they have everything covered.

For best results, bring us on as soon as possible. We can even help you look for a company to buy.

For more information or to speak to a member of our team, fill in the contact form on our homepage.

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