Mergers and Acquisitions: The Importance of Due Diligence to the Process

Mergers and acquisitions (M&A) can be an exciting and critical part of a company’s growth strategy and transformation. When done right, a successful M&A can help both involved parties gain valuable market share, expand their product lines, boost revenues, and build more equity into their brands. However, while the future is without a doubt filled with great promise, it’s important not to get too ahead of yourself. When an M&A transaction goes wrong, it can be a different story, involving cultural conflicts, legal disputes, significant losses, and even bankruptcy.

Many companies rush headlong into these important transactions without committing adequate attention to each phase of the transaction. It is true that seeing an offer accepted and a seller looking forward to passing the firm on to a new owner is quite thrilling. Because of the excitement, the closing process is often neglected or not handled seriously. Executives should remember that even though the future of the transaction is exciting and enticing, it is necessary to evaluate one of the most critical steps in the closing stages of this growth strategy. This is referred to as due diligence. Continue reading to learn about the significance of this process to M&A deals or why does this process matter to both parties involved (buyer and seller).

What is Due Diligence?

Due diligence is the process of verifying, investigating, or auditing a possible deal or investment opportunity in order to validate all important facts and financial information, as well as anything else raised throughout an M&A deal. Due diligence is conducted prior to the closing of a sale to provide the buyer with confidence in what they are acquiring and to assist the seller in evaluating the fair market value of their firm.

Why should Due Diligence matter to you?

Due diligence is important, because purchasing and selling a firm is a major undertaking. When buying a business, there is a lot of money and effort involved, a buyer does not get all the information about the firm before and during the negotiating period. Also, the quality of financial information might change at times. As a result, performing rigorous due diligence for purchase is
more crucial than ever. While it may appear that due diligence favors only one side, the fact is that due diligence benefits both the buyer and the seller in the acquisition of a firm.

a)      From a Buyer’s Perspective:  

       Due diligence offers them confidence that they’re making the right decision and have all the information they need to make an informed purchase. In mergers and acquisitions, purchasing a business without doing due diligence significantly raises the buyer’s risk of the transaction. With the information of due diligence, companies can learn more about the seller’s current company health and partner relationships, which either validates positive assumptions or warns them of possible anomalies.

b)      From a Seller’s Perspective

       Due diligence is carried out to instill trust in the buyer. However, due diligence can benefit the seller as well, since it allows a business owner to delve deeper into the financial integrity of their firm and may reveal a higher fair market value for the seller’s company than was previously anticipated. As a result, it is not commonplace for sellers to prepare their own due diligence reports prior to possible purchases.

What is included in Due Diligence reporting?

     Environmental Considerations – Certain environmental concerns may be related to company activities for particular firms. Here, due diligence teams should analyze such possible threats and how they influence the organization now and in the future.

     Legal Reviews – Another key aspect of due diligence is determining if the company being bought has any potential liabilities. Depending on the size of the firm, legal teams may be required to investigate present relationships and contracts to verify there are no irregularities before proceeding.

     Financial Information – The majority of organizations spend most of their due diligence time reviewing and verifying financial reports. All paperwork and accounting information should be current and precisely reflect the numbers reported throughout the deal-making stage.

     Business Sustainability – Cash flow management and long-term business sustainability are major elements of M&A due diligence. A thorough examination of prior years’ sales data can assist potential buyers in diagnosing trends and determining if their investment is profitable.

      IT Capabilities – Identifying your company’s existing security threats or other IT issues is another method investors evaluate your company’s worth. Depending on the industry you represent, this may be an important element to consider when evaluating your company.

Bottom Line

Due diligence will always be an important part of mergers and acquisitions, especially as deal stages conclude. As a result, due diligence effort must be properly planned and executed in order to be carried out effectively and with the least amount of needless intervention. By knowing what to expect when preparing for a successful business transaction, you’ll be able to give accurate and timely reporting that boosts the value of your business while assisting you in addressing irregularities if and when they occur.

Are you willing to dive into the M&A Strategy?
If you’re planning to retire, sell your firm, or if your business needs to develop and grow, then M&A is the right move for you and your firm. It can be an excellent exit plan and a smart approach for improving the firm’s overall health, productivity, and bottom line.

We’ll make it easier for you in the process of preparation and identifying targets. Choose HWA Alliance of CPA Firms, Inc. as your firm’s ideal buyer and immediately reap the total value of M&A. We provide business owners with convenient, creative, and value-maximizing solutions for developing and exiting their firms. We have successful M&A experience working across different state lines and different industries. Partner with us, and we can help you save your time, money, and resources by strategically positioning your firm to continue doing business under the umbrella of HWA Alliance.

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