Mergers and acquisitions are a vital component if not a critical one for a company’s strategical growth. A crucial aspect of the success of M&A is the responsibility related to the due diligence process. Performing due diligence on a potential acquisition is like no other type of financial analysis—not because the review itself is different, but because of the logistics of the situation. The report done to avoid less than ideal outcomes of M&A due to corporate culture and personnel mismatches, overplay of performance forecast and theoretical valuations and legal complications post-M&A.

Hence the buyer company are more in demand to perform complete due diligence on the target company to assess all the benefits and liabilities of the offered acquisition. For a full takeover of the target company, the statements of all financial, legal and environmental assets and liabilities investigated, and there are various subset analyses performed.

Therefore, to understand the need to prioritize due diligence during M&A, let us know what? Who? When and how? Does it play a role in the M&A lifecycle and how is different from an audit?

What are the types of Due diligence?

There are mainly three kinds of Due Diligence to will be conducted.

       I.         Business and financial due diligence

• Review proposed business strategy and transaction terms
• Perform internally and independent valuation and feasibility report
• Conduct quality of earnings audit

     II.          Accounts and tax due Diligence

• Conduct and perform external audit and trend and financial ratio analysis
• Ensure compliance with current accounting laws and policies
• Analyze historically and present tax exposure and position
• Evaluate and structure tax savings and neutral deal options

    III.          Legal due diligence

• Risk analysis balance sheet and off-balance sheet liabilities
• Evaluation of the proposed terms and conditions

How does due diligence play a role in M&A Lifecycle?

There are three main stages, and due diligence begins from the second stage.

       I.          M&A strategizing and Target Screening

• Establish ways and means to achieve the goals.
• Compare the evaluated growth through M&A and other ways
• Evaluate the capacity and capability internally for M&A
• Identify the acquisition criteria
• Screen and select potential companies to meet the principles and criteria.
• Develop a target-buyer synergy analysis for all selected potential targets
• Develop a target-buyer merger valuation model for additional quantification of the best value

     II.          Operation Execution and Finalization

• Establish and conduct due to diligence methods of all the aspects of the target company, including legal, financial, accounting, and tax.
• Present and negotiate the M&A deal offer and terms.

    III.          Integration and Post-merger integration (PMI)

• Establishing communicating the M&A integration plans
• Finalization and implementation of the PMI report and Plan

Who does it to benefit from conducting due diligence?

       I.          Benefits for buyers

• To make more well-informed decision
• Avoid any unpleasant surprise post-M&A with complete and proper due diligence
• Evaluation and implementation of better business strategy

     II.          Benefits for targets

• Tax consequences of the sale are well understood
• Avoid any unpleasant surprise post-M&A with complete and proper due diligence
• Better preparation of buyer enables precise and smooth  before and after M&A

    III.          Benefits for stakeholders

• Buyers and sellers have informed and realistic estimates and expectations from the M&A
•  Informed employee, vendors, lenders, and customers because they are also part of the process and therefore have a stake in the future success
• Investors and lenders recognize Equity and loans.

When do challenges arise while conducting due diligence?

       I.          Application of relevant standard accounting

• The target’s financial statements don’t agree to the pertinent bookkeeping guidelines required by the accounting authority where the buyer is domiciled
•   Hence the buyer has to retrospect the financial statements to the standards relevant to the domicile accounting standards of the buyer
•  This can be avoided by adopting IFRS

     II.          Sarbanes–Oxley (SOX) compliance

• Small to medium size remote privately-owned businesses regularly don’t have the transfer speed for or see the advantages of actualizing reliable interior controls.
• Traded on an open market U.S. purchaser must guarantee that they have the assets to carry these objectives to post-merger SOX is consistent in an ideal way.
• Included vulnerabilities encompassing focuses without reliable inner controls, increment the exchange chance for purchasers.

    III.          Contingent liabilities

• Another fundamental issue includes unexpected liabilities and other wobbly sheet commitments that were not revealed by the objective.
• For instance, there might be unused and unpaid PTO liabilities, exceptional protection, and duties or business exercises that may abuse laws and guidelines where the purchaser is domiciled.

    IV.          Transfer pricing and related party transactions

• The target’s auxiliaries may take part in intercompany dealings that probably will not be executed under business terms and expands the danger of move valuing and charge law infringement.

     V.          Loans and liens

• Credit documentation may be absent or inadequate. Hence, the purchaser and its legitimate group must guarantee that all material resources utilized as advance security are represented and unveiled.
• A Uniform Commercial Code lien search is a decent spot to begin.
• Future removals and deals of idealized resources without approval from lien holders will bring about claims.

    VI.          Site/Asset inspections

• There might be calculated difficulties when attempting to examine target resources that are situated the world over. Purchasers need to adjust the danger of not getting total affirmation over the fulfilment of those advantages and the risk of deferring the M&A bargain.

  VII.          Tax obligations

• Through the modest representation of the truth of turnover or exaggeration of working consumption, the objective may tenaciously or accidentally come up short on or not pay corporate and singular annual expenses.

VIII.          Target’s forecast and insights

• Target, the executives, may have a ruddy perspective on its organization’s future potential and get guarded when this positive thinking addressed. Purchasers must stay objective since this idealism regularly imbued in the objective’s conjecture and business reports.

    IX.          Measuring potential synergies

• Assessment and examination of potential exchange cooperative energies may contain some inclination, particularly when a purchaser aspires of framing a more significant and increasingly enhanced solidified organization.
• Moreover, the absence of freedom between the purchaser’s board and its supervisory group may bring about neglecting significant M&A contemplations and models.

      X.          Pressure to close

• M&A is requesting, and strain to conclude and close an exchange rapidly may bring about compromising during the due persistence process.

Difference between audit and due diligence?

The motivation behind a budget summary review is to provide the purchaser with sensible confirmation that the target company’s financial summaries are valid and reasonable. In any case, audit review frequently doesn’t distinguish critical issues that a financial specialist may be keen on, for example, the efficacy of the management and the quality of earning.

As referenced in the previous segment, the due diligence the process covers a broad scope of regions. Although a budget reports the review may give a heads-up for a buyer to screen the target, but for the most, the part doesn’t provide top to bottom data on each territory that the buyers are keen on it.

 Due Diligence Checklist:

·        Market and corporate overview

·        Corporate and personnel culture

·        Benefits and risk managements

·        Assets and liabilities

·        Regulatory compliance, policies, and procedure

·        Product, sales, marketing and Distribution

·        Financial, accounts, and tax

·        Legal and related matters