The 5 Cornerstones of M&A Due Diligence
We’ve all heard the phrase, “Do your due diligence.” Or the cautionary tale, “They didn’t do their due diligence.”
Due diligence is simply research. An investigation to confirm all of the facts before a business transaction takes place. This investigation should be undertaken by both parties – the buyer should confirm all of the facts related to the assets they are buying, and the seller should confirm that the buyer has adequate resources to complete the purchase (at a minimum).
Due diligence encompasses slightly different goals depending on the type of transaction (i.e. due diligence before a merger has different variables to consider then due diligence before buying a security from a company). If you are involved on either side of a merger or acquisition, due diligence should typically look at these five cornerstones as a starting point, then expand as needed per the type of transaction, industry, and/or business.
M&A Due Diligence Cornerstones
1. Business model due diligence develops a very clear understanding of how the business functions and makes money. How sustainable is the revenue? Cash flow? What is the forecasted growth? What variables will affect that?
2. Accounting due diligence involves a deep dive review of all financial statements, often with the help of an external accounting firm, to understand past performance, earnings, and as many details about the business as possible.
3. Legal due diligence focuses on identifying any current or potential liabilities, by reviewing all relevant legal documents (e.g. customer/supplier contracts, past litigation, real estate leases, etc.)
4. IT due diligence varies greatly by industry, but typically focuses on IT security, ownership of proprietary technology/custom software, and device inventories.
5. Environmental due diligence is all about risk – in a very literal sense. All properties and assets should be assessed for environmental risks, potential contamination, litigation risks, etc.
As you might imagine, this level of analysis involves a lot of paperwork. Expect to review the following documents as a starting place:
– Financial statements
– Tax records
– Organizational charts
– Supplier contracts
– Customer contracts
– All insurance coverages and recent claims
– Software agreements
– Press releases and media coverage
– Past and present litigation
– Licenses and permits
– Real estate leases, deeds, etc.
– Employee documentation and benefits information
Symmetrical assists Middle Market companies strategically assess their needs and prepare for big transitions. If you are considering buying or selling a business, contact us for a confidential discussion about how we can help.