Mergers and acquisitions can be an exciting part of business transformations, especially if you're a business owner who's received an attractive offer from a prospective buyer. However, while the future is without a doubt filled with promise, it's important not to get too ahead of yourself, as the next step in the process can be a lengthy one - due diligence.
What is M&A Due Diligence?
Due diligence is an important part of the acquisition process and represents the orderly investigation of any matter pertaining to business dealings. Since no two companies are the same, it's important that a diligent effort is made in order to obtain any information that would be relevant in the sale or purchase of an organization and its assets. In mergers and acquisitions, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives.
Why Should Due Diligence Matter to you?
While due diligence may seem like it only benefits one party, the fact is that due diligence helps both the buyer and the seller in a business acquisition.
From a buyer's perspective, due diligence gives them peace of mind that they're making the right deal and have all the information they need to make a good purchasing decision. This information can include learning more about the company's existing customers and partner relationships and either validates positive assumptions or alerts them about potential irregularities.
From a seller's perspective, due diligence helps a business owner take a deeper dive into the financial integrity of their business and can also help them uncover the fair market value of their company. As valuations and acquisition prices are only getting higher for many business sectors, it's essential that companies invest in quality due diligence reporting and services.
What is included in Due Diligence Reporting?
Due diligence reporting can be broken down into five main categories:
Environmental Considerations - For some businesses, there may be certain environmental risks associated with business operations. In this case, due diligence teams should take the time to review such potential risks and how they affect the company currently and in the future.
Legal Reviews - Understanding if the business being acquired has any potential liabilities is another important consideration in due diligence. Depending on the size of the organization, legal teams may need to be deployed to look into current partnerships and contracts in place to ensure there are no irregularities before moving forward.
Financial Information - Most companies spend the majority of their due diligence looking at and confirming financial reporting. All documentation and accounting information should be up to date and accurately portray numbers that were disclosed during the deal-making stage.
Business Sustainability - Cash flow management and long-term business sustainability are important aspects to M&A due diligence. Careful analysis and previous years of sales data will help potential buyers diagnose trends and decide if their investment is worthwhile.
IT Capabilities - Identifying your company's current security risks or other IT problems is another way that investors asses your company's value. Depending on the industry your business represents, this may be another significant factor when evaluating your business.
Due diligence will always be an important part of mergers and acquisitions, especially as deal stages come to a close. By knowing what to expect when preparing for a successful business transition, you'll be able to provide accurate and timely reporting that increases the value of your business while helping you address irregularities if and when they arise.