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Due Diligence Process for Merger and Acquisition

Dashmeet Kaur

| Updated: Jan 15, 2020 | Category: SEBI Advisory

There is no shortcut to success; everyone must have heard this quote. However, in the corporate world, there exists one such strategic tool through which a company can quickly attain tremendous growth. That tool is none other than Merger and Acquisition. An essential factor that drives the process of Merger and Acquisition is due diligence. This blog will highlight the role and reasons to conduct due diligence for M&A.

A Synopsis of the term Due Diligence

Due diligence refers to the voluntary investigation that a person or business undertakes before entering into a contract with another party. Usually, the buyer/investor company conducts due diligence prior to finalizing the deal and transacting the agreement amount to the target company. It is an extensive analysis of the company’s background which the Acquisition company shall takeover. Due diligence in Merger and Acquisition unveils about the customer base, financial position, workforce, debts, pending and potential lawsuits of the target company.

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What is the Significance of Due Diligence for M&A?

The Merger and Acquisition either bridge in the gaps between day to day operations, or it might result in failure. So, in both cases, the Acquirer has to bear the consequences of the deal. Therefore, due diligence is paramount while merging or acquiring a company since it ensures success. Let’s take a look at the advantages of due diligence for M&A:

  • Due Diligence in Mergers and Acquisitions involve the evaluation of a prospective business deal by scrutinizing the legal, financial, intellectual and other substantial information of the concerned party.
  • During the procedure, the investor set some company’s objective, and after thorough due diligence, it concludes whether the target company has the potential to meet those objectives or not.
  • The supreme agenda of such an investigation is to validate that there are no hidden traps associated with the Merger and Acquisition.
  • One can form a perfect strategy at an initial stage of due diligence to carry out the business operation after M&A.

Key Steps to Follow in the Process of Due Diligence

Follow this step by step guide to due diligence for M&A:

First Step : – The first and foremost step that an Acquirer must take is to consult a team of professionals. Hire a competent team that will further conduct the due diligence of your target company. Since due diligence is a lengthy and complex procedure, it’s prudent to seek professional help. Under the guidance of finance and legal experts, the scope of errors and mistakes gets minimized. A proficient due diligence team comprises of chartered accountants, personal consultants, experienced lawyers, and other service providers depending upon your business industry.

Second Step : – The next step is to collect all the relevant essential documents. Once you employ a due diligence team thereon, it will create a complete checklist of the required documents which are needed for inspection. The team will propose a confidential agreement to the target company and request to check the prescribed areas of the company. 

Third Step : – At this stage of the due diligence, the team will review all of the provided information by the target company. In case, the buyer suspects any information to be untrue; then he can further raise queries in regards to the documents. Thereby, the target company will address all the concerns of the Acquirer. However, if the target company fails to provide reasonable justification to the buyer, then he can request for additional information.

Fourth Step : – Lastly, after getting entirely satisfied, both the companies finally sign the agreement of takeover with consent. Thus, Merger and Acquisition takes place successfully.

Due Diligence Checklist for Merger and Acquisition

Here is the list of things that you must emphasize on during the procedure of due diligence for M&A:

  • Evaluation of Corporate Structure: Corporate attorneys will audit the corporate structure and capitalization of the concerned company. Some financial documents that the lawyer’s review include a Certificate of Incorporation, warranties, credit agreements, stock option agreements and plans, recapitalization documents; list of all the security holders, cash flow, balance sheets etc.
  • An Estimated Cost of Material Assets: The material assets plays a crucial part in the transactions of M&A. Therefore, it is indispensable to reckon the total value of the target company’s assets. Also, consider any debts or liabilities against those assets. Primarily focus on the assets of inventory stock, real estate, intellectual or technology property, and so on.
  • Strategic Fit with Buyer: Every company creates a plan to achieve a specific objective. So during due diligence for Merger & Acquisition, a must company must deliberate the strategic fit of the target company. As a potential buyer, you must contemplate on the future performance of the company you aspire to acquaint. Explore the tenacity of your target company, and its capacity fit strategically within your existent business. Create a clear vision of your company’s future and how M&A will impact your business plan.
  • Check onto Material Contracts: Being the most time-consuming yet a principal component of due diligence, one cannot skip inquiring about the material contracts of the target company. Closely review the list of these contracts:

• Guaranties, credit, and loan agreements;

• Customer and supplier contract;

• Agreements of joint venture/partnership;

• Settlement agreements

• Previous acquisition agreements if any;

• Equipment leases

• Real estate purchase/lease agreements

• Powers of attorneys

Other than the above contracts, an Acquirer should also investigate the documents of distribution, dealer, sales agency, dealer, advertising, equity finance agreements, etc. 

  • Tax Due Diligence- It provides the historical income tax liabilities of the target company. Moreover, it gives an analysis of the tax carries forward along with their potential benefits. The attorneys shall verify that there will not incur any unexpected tax problems after M&A.

Conclusion

The due diligence is a potent way to lessen the risk involved in Merger and Acquisition. It gives a better understanding about the nature of the agreement and whether the deal will be beneficial to the company portfolio or not. Consult Swarit Advisors for due diligence for M&A. We have an efficient team of Lawyers and Chartered Accountants who can help you provide accurate information about the target company with proper evidence.

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Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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