Financial and legal due diligence

Significance And Types Of Financial And Legal Due Diligence For M&A Success

For any business considering a merger or acquisition of another business must be careful to make it a success. If you go through the reviews and reports of M&A transactions, you will know that it is a most complex activity for any business. As a result, most of them fail every year. If you consult an expert or talk to any business owner who has experienced the brunt of a failed acquisition, you will know that the main culprit for such failure is inadequate due diligence. In fact, without proper due diligence, a merger or acquisition can never be complete or successful.

It is therefore crucial that you take a realistic, strategic and holistic approach to due diligence so that you can avoid any M&A catastrophe. The reason for this is that financial due diligence only will not provide you with the clear, better and bigger picture of the company or the industry. For example, if the business owner is not emotionally ready to let the company go or if any proposed regulatory changes may result in a decline in the industry or if the company have any pending legal disputes involving product liability or HR issues, your merger or acquisition will be far from successful. It is, for this reason, you must have Financial and legal due diligence to make your approach more holistic.

Uncover all risks

To ensure success in your merger or acquisition, it is critical that you uncover all risks involved in it. That means you will need to look at all the five primary types of due diligence for sale of business if you are seriously contemplating such a transaction.

  • Financial due diligence – This signifies the starting of your due diligence process. This includes analysis and review of the company you want to target. You must consider the financial statements and book of accounts of the company, tax returns and accounting process, policies and economic trends.
  • Legal due diligence – This is a critical aspect of due diligence that involves thorough analysis and review of all contracts and documents, agreements, environmental factors, all ongoing, pending and potential litigations and other regulatory and legal compliance.
  • Business due diligence – This process involves analysis and review of business plans and strategies, customers, products and services, markets and its competition. This will help you to know or forecast any change the industry may undergo. It will also help you to understand whether a customer encompasses a large majority of the customer base of the target company. Knowing this, you will be able to judge the amount of risk the customer may present while leaving due to the closing of the transaction.
  • Operations due diligence – This process includes the analysis and review of technology used by the target company, facilities, fixed assets, real estate, insurance coverage, significant operational risks, pricing and execution of the deal
  • Human Resources due diligence – This is the last of all due diligence. It involves looking into the structure of the organization, management, employee benefits, personnel, and labor matters. It also looks into any union disputes or other issues that may exist with the employee non-competes.

All the times you must consider and ensure the long-term viability of the company that you intend to form from the acquisition. You must consider important aspects and factors such as the due diligence team, internal audit team, benefits and risks of M&A, Due Diligence for sale of business and other three phases of it.

Importance of due diligence

Transactions that involve due diligence process are complex, and if it is performed precisely, it will result in high chances of success. The primary objective of due diligence is to contribute towards making informed decisions. It enhances the quality of data and information available to you. However, the importance of it differs from the buyer’s and seller’s perspective.

From the perspective of a buyer due diligence provides the comfort and assurance that the expectations concerning the deal are correct. It will substantially decrease the risks of the buyer in mergers and acquisitions increasing the trust in the target company.

As for the seller’s perspective, due diligence will provide a rigorous and better financial examination. It may, in fact, reveal the fair market value that may be more than what the seller initially thought was.

Therefore, it is always advised that you hire the service of expert merger and acquisition firms in India before you even start with the due diligence process. They are the professional experts who will ensure that all aspects are examined to eliminate the risk from such mergers and acquisitions to the last iota.

Jobs done by the M&A firms

When you hire a reputed M&A firm, they will follow the set standards and perform several responsibilities such as:

  • Confirming and verifying information found during the investment process
  • Identifying potential defects in the investment opportunity
  • Obtaining useful information for the deal and
  • Ensuring that the investment opportunity is in compliance with the investment criteria.

They will work towards ensuring safety and security in the deal and make your M&A endeavor a success. They will help in the transfer pricing agreement and others to ensure that you strike the best deal at the best price.

The cost factor

The cost of due diligence largely depends on its scope, duration, and effort put in and on the complexities involved with the target company. However, the cost involved is justifiable when compared with the risks involved in the merger and acquisition of a company when you fail to conduct due diligence. Usually, the parties involved in the transaction determine between them as to who will bear the cost of due diligence.

Ideally, this cost is shared by both buyer and seller. Each will pay their team of due diligence that may involve different investment bankers, attorneys, accountants, and any other consulting personnel.

In a nutshell, with a meager payment for due diligence, you will come to know about the financial condition, technology and patents, strategic fit, the target base, workforce and management and legal issues of the target company.

Author Bio:

Seema Mehra is a Chartered Accountant at Ashok Maheshwary & Associates, best ca firms in india that provides accounting services in india in a convenient manner. She is a professional writer and loves to share Financial related topics.

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