What Should Due Diligence Include During Mergers and Acquisitions?

What Should Due Diligence Include During Mergers and Acquisitions?

Mergers and acquisitions can be critical components of a firm’s growth scheme. Successful acquisitions may help a business increase market presence, improve profitability, and fill gaps in their product or service portfolio. Unfortunately, sometimes these transactions don’t end up meeting expectations, causing negative surprises, and damaging the firm and its’ board of directors. In 2015 alone, shareholders filed lawsuits in 65 percent of merger and acquisition transactions valued at more than $100 million, involving Delaware-incorporated companies.

Considering the stakes involved in merger and acquisition (M&A) transactions, directors must competently oversee the process from initiation to integration, including doing their due diligence to ensure that the transaction is not fraught with untenable risks. If your firm is not experienced in these types of transactions, it never hurts to have an expert mergers and acquisitions lawyer guiding the process. If you’re considering entering into one of these transactions, take a look at what should be factored into your due diligence process.

Red Flags and Other Deal Killers

This is the no-brainer part of M&A process where you may do a high-level analysis of the target company that may reveal some issues with terms, culture, technology, and other issues that may affect valuation. It is a great place to start, but too often, due diligence ends here. Let’s take a look at some additional factors that should be reviewed during the due diligence process.

Legal Due Diligence

Any review of a company’s worth should include any legal exposure from other agreements and intellectual property matters. This stage of due diligence is often led by corporate counsel in order to best understand what terms need to be in place for the acquisition agreement, any transition services, indemnification, true-up mechanisms, and escrow requirements. All contracts and IP holdings should be analyzed at this point.

Commercial Due Diligence

This phase enables your firm to understand the target’s market segments, industry outlook, competition, and operating model effectiveness. Key personnel should be interviewed, competition surveyed, as well as customers and suppliers. Functional areas that should be addressed include:

  • sales
  • marketing
  • technology
  • operations

Financial and Accounting Analysis

Analyzing audited financial statements, historical financial data, and publicly available data is key to this phase, as are interviews with key financial personnel and external auditors.

Tax Due Diligence

This stage involves a deep analysis of the tax profile of the target company, including exposure, losses, credits, etc. This is done by analyzing tax returns, financial statements and other supporting documents.

Federal Corrupt Practices Act Diligence

Looking into policies and past practices can reveal evidence of international bribery or corruption. Now is the time to mitigate or pull out.

Human Resources Due Diligence

Here you want to look at the target’s relationships with its’ employees, including insurance, compensation packages and post-employment obligations.

Reputation Analysis

Conduct background checks into key executives and shareholders to reveal prior bad acts, such as fraud, money laundering or labor issues, as well as bankruptcy or excess litigation.

Integration Analysis

This process looks at how well the two companies will mesh when the transaction is complete. Will there be significant operational hurdles and costs to overcome them?

Other Due Diligence

Before moving forward with an acquisition, it is also helpful to look at other potential risk targets, including insurance, engineering, and environmental practices.

If you are in the process of acquiring another company, don’t take shortcuts with your due diligence. Contact Willcox, Buyck & Williams, P.A. today for a consultation.