November 19, 2015

5 Due Diligence Activities For A Successful M&A Transaction

By Manuel Azuara

M&A transactionDue diligence procedures are an essential way to test the waters before jumping into an M&A transaction with a proposed target entity. Thorough due diligence is not a courtship, negotiation, or inquisition; it’s a fact-finding mission and an essential part of any well-executed M&A process. This critical exercise will help uncover hidden information, synergies, or obstacles to guide a company toward evaluating the appropriate purchase price and implementing a successful integration strategy. After a company submits its Letter of Intent (LOI), facts start coming in fast and heavy. Therefore, it’s important to know what’s ahead before making a commitment, or, as the old adage says, “look before you leap.”

Here are five ways to ensure a thorough due diligence process:

  1. Evaluate historical and forecasted financial performance of the proposed target under its current business plan and reasonableness of those forecasts
  2. Consider the need for additional working capital to fund growth initiatives
  3. Review the compatibility of existing information technology (e.g., ERP, CRM, Billing Platform) and financial department infrastructures and the possible additional costs to integrate or implement new technology post transaction
  4. Uncover the existence of any employee entitlements, contracts, or agreements not already disclosed that might have monetary change of control ramifications
  5. Analyze tax benefits, payments, or penalties related to acquiring the proposed target

The sooner you prepare, the better

While the due diligence process is laborious, it is a crucial step towards a successful M&A transaction. Each transaction will have unique due diligence requirements depending on the nature of the transaction and the relative size of the proposed target. Therefore, it’s of the utmost importance to allocate a sufficient amount of time as soon as a LOI is executed between the acquirer and proposed target to begin the due diligence process, as it will provide valuable information to negotiate a fair purchase price and determine whether other guarantees or assurances should be required.

How We Can Help

Is your organization due diligence ready? If you need some guidance now or in the future, get in touch! Our cross-functional team of experts provide due diligence procedures that incorporate an extremely in-depth assessment of a targeted entity. When properly done, due diligence provides valuable information to support the proposed transaction and identifies early the issues that must be addressed to combine entities successfully. Remember, the cost of well executed due diligence far outweighs the costs related to a bad acquisition. Learn more about our transaction advisory practice.

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About Manuel Azuara

As Principal at Bridgepoint Consulting, Manuel helps to lead the firm’s Financial Consulting practice. His background includes more than 20 years of experience in business process re-engineering and corporate governance across a range of public and private sector clients. Manuel has revenue recognition expertise and has helped multiple companies in times of crisis, including mergers and acquisitions, fraud investigations, exit strategies and cash optimization. Prior to Bridgepoint, he was CFO of Public Strategies, Inc. Manuel received his bachelor’s degree in accounting from the University of Texas at Austin and is a Certified Public Accountant* in Texas. Recent Blog Posts LinkedIn Full Bio