M&A Due Diligence

Due diligence is the process of discovering, validating and confirming the business value of the proposed acquisition. Due diligence criteria vary based on deal type, however, some key elements of due diligence include strategic fit, customer and operational fit, and cultural fit among other factors. The key outcome of the due diligence is to validate deal value, and identify risks, potential deal breakers, and potential integration issues that would affect the deal value realization. Depending on the sources of value identified by the acquirer, the priorities of the due diligence may vary. These may include acquiring competencies, skilled people, customer base, access to critical suppliers, access to key products, or R&D among other things.

Due diligence execution involves a number of functions including corporate strategy, finance, legal, marketing, operations, human resources, procurement, etc. Utilizing a consistent due diligence checklist across lines of business being evaluated ensures that the results are consistent and comparable. The due diligence checklist may vary between different transactions and can be modified to the specific needs and strategic priorities of an  acquisition.

Comparing processes and practices between the two businesses and benchmark against the acquirer’s business or against industry best practices helps identify gaps and opportunities for improvement after the close, and helps validate synergy benefits, assess risks, validate merger assumptions, and identify action plans for integration after the deal closes. Due diligence covers processes such as accounts receivables, payables, cash management, inventory management, billing, payroll, supplier management, supply chain management, revrec, product development, operations, controls, tax returns, etc. For public companies review of all public records such as annual reports and SEC filings, company history, management turnover, forward looking forecasts.

Some of the skills required for due diligence include analytics, data analysis, interviewing,  documentation, reporting and communications. Ultimately the findings must be documented and presented to management in a clear and concise manner so that, if needed, the acquirer can adjust the deal valuation and negotiate a new value based on risks and synergy potential by taking a forward looking view of the opportunities and risks.

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