A merger occurs when two or more businesses consolidate to form a new company, combining forces to generate benefits. An acquisition happens when a company buys/takes over another business, purchasing the target company’s stock. Due diligence is the unsung hero of successful mergers and acquisitions. Through research and analysis, due diligence ensures that both parties benefit.
What is Due Diligence?
Due diligence is the analysis and research an organization or company undertakes to prepare for a merger or acquisition. It helps evaluate the risks and advantages involved in the transaction.
Why Undertake Due Diligence?
Due diligence enables a deep understanding of the company you are interested in acquiring or merging with. It confirms or disabuses impressions regarding financial, commercial, legal, and other information. It’s about verification and trust.
Kinds of Due Diligence
There are four main kinds of due diligence.
- Commercial due diligence involves understanding how the company creates income, its goals/strategies, and the competitive environment. It necessitates looking into the company’s strategic plan, business model, key customers, suppliers, and employees. It often includes an examination of the company’s record of social responsibility, diversity, inclusion, and sustainability.
- Financial due diligence involves examining the company’s financial records (financial statements, year-to-date statements, trial balances, financial forecasts, tax returns, bank statements, budgets, etc). Look for tax liabilities, product margins, equipment repair/investment, operational inefficiencies, employee turnover rates, obsolescence, and working capital levels.
- Legal due diligence includes reviewing legal issues that affect the company (ongoing/pending litigation, past lawsuits, employment contracts, leases, customer/supplier agreements, laws/regulations that apply, licenses/permits, real estate, intellectual property, and corporate documents such as incorporation certificates, bylaws, and shareholder agreements, etc.).
- Customer due diligence applies to businesses in the financial sector and helps protect against money laundering or terrorist financing. It involves identifying customers, discovering the nature of ownership, and uncovering any suspicious transactions/practices.
- Business mergers and acquisitions are two excellent ways to increase business growth, helping companies acquire new clients and expanding the market share through a single transaction. They help companies accelerate plans and build momentum. However, undertaking due diligence before completing a merger or acquisition is critical. Due diligence is the unsung hero of successful mergers and acquisitions.
Need help with due diligence preceding a merger or acquisition? Contact Cook and Company Chartered Professional Accountants. With over 20 years of experience helping create financially resilient companies, Cook and Company know the business. We encourage skillful risk management to deal with the variables involved in operating a company. We can help with your business merger or acquisition.
