Merger and Acquisition transactions are not as easy as looking at the target’s financials before making a deal.
It is essential that all parties to a proposed transaction fully understand the risks and opportunities evident in any potential mergers and acquisitions (M&A) deal.
If you are going through an M&A transaction or looking to do so, you will require due diligence. Thorough and robust due diligence reveals essential information and insights needed to make informed decisions.
Without it, the whole deal could fail. Watch the full video below.
What is Due Diligence?
Due diligence (DD) is a process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information and to verify anything else that was brought up during an M&A deal or investment process.
This typically involves a comprehensive review of the target’s financial, legal, operational, and strategic standing in order to identify potential risks and ensure the acquiring party is making a sound investment.
DD is completed before a deal closes to assure the buyer of what they’re getting and can take anywhere from 3 – 12 months, depending on the size of the business and type of sale.
How do you start Due Diligence?
The DD process in an M&A transaction usually begins after a letter of intent or term sheet has been signed by both parties. The buyer initiates the DD process through a Request For Information.
The buyer and seller will typically form their own DD teams, composed of internal and external experts, such as lawyers, accountants, and industry specialists.
The team will review the requested relevant documents, including financial statements, forecasts and budget information, client contracts, and company records. They may also conduct on-site inspections, interviews with management and employees, and analysis of market trends.
As the Seller, your DD team works to validate all information pre-emptively before sharing it with potential Buyers. This important process gives you the opportunity to identify any material issues that could pose a risk for the Buyer and ideally be addressed to the Seller in the right way for a smoother transaction process.
Why pay for Due Diligence if I could do it myself?
Having a professional advisory firm handle the DD ensures that as many possible risks are analysed through a strategic and financial lens. A thorough check of all the data is essential to ensuring a good deal.
We recommend using an online Data Room, which provides an extensive index of all information disclosed to the new buyer during the DD process, which can help protect you from a potential dispute after the sale.
Furthermore, an external advisory’s valuation and team of lawyers, accountants, and industry specialists will assist in negotiating outcomes.
For example, if your asking price is $10 but after the DD, the buyer only offers you $8, your advisors may try and negotiate an Earn Out agreement whereby you will get the extra $2 if the business reaches the forecasted projections by a set date.
Consequences of bad Due Diligence
Bad DD can have serious consequences on an M&A transaction. It can lead to unexpected costs, missed opportunities, and even the failure of the deal.
If the Buyer feels that there are too many risks and inconsistencies, they might reduce their offer price substantially or drop out of the deal altogether.
Or worse yet, they could go through with the sale and return afterwards to dispute it, claiming that certain information was withheld or inaccurate.
On the other hand, a strong DD protects the seller from false claims and maximises exit value.
If you are selling your business or plan to in the next 2 – 5 years, our expert team has developed a process designed to drive the highest probability of transaction success and ensure that our clients’ exit value is maximised.
We guide you through the whole M+A transaction end-to-end, including the years following earn-out agreements. Check out our previous video as we break down the steps in the M&A process.
Download our e-book explaining the whole M&A process HERE.
Contact us today at admin@elementsag.com.au or call us on 07 3878 9181.
