November 19, 2015
5 Due Diligence Activities For A Successful M&A Transaction
Due 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:
- Evaluate historical and forecasted financial performance of the proposed target under its current business plan and reasonableness of those forecasts
- Consider the need for additional working capital to fund growth initiatives
- 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
- Uncover the existence of any employee entitlements, contracts, or agreements not already disclosed that might have monetary change of control ramifications
- 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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