One of the consequences of the described problems in the economy is the increase in the number of mergers and acquisitions, as large companies can more easily cope with an unstable situation. Check five key points of any due diligence process in M&A in the article below.
The Role of the Due Diligence Procedure in the Implementation of Mergers and Acquisitions
Currently, the definition of due diligence is considered in a broader sense: due diligence is understood as a comprehensive check of the state of an object or asset in order to identify certain risks that may arise during operations with this object or asset. As a rule, such verification is carried out by independent consultants.
Due Diligence for business is a standard procedure for checking an investment object, designed for an independent, objective assessment of potential risks. It cannot be called formal since it will really allow you to get factual information on another structure in which you want to invest money. According to various estimates, only three transactions out of ten implemented bring added value to their initiators in the form of synergistic effects or strengthening the company’s market position. The rest end in failure and lead to a decrease in business efficiency, despite the seemingly obvious motives and advantages of the transaction.
Initially, “due diligence” activities were mostly required of client companies to check suppliers before paying for goods and services. From tax deductions, affiliates and founders, you can understand whether a deal is made with a one-day firm, a fraudulent counter, or a participant in tender collusion. Carelessness in this matter can lead to large losses and litigation.
Which Are Five Key Points of Any Due Diligence Process?
Mergers and acquisitions occupy a significant place in the system of market relations. But this method of business restructuring does not always lead to a positive result since it is often influenced by various factors. Factors that may directly or indirectly affect the outcome of an M&A transaction require close and competent analysis. It is extremely important to analyze both internal and external factors.
Among five key points of any due diligence process are:
- Balance sheets.
- Partnership agreements.
- Income statements.
- Existing contracts.
- Profit/loss records.
Due Diligence for Business and Investors – the Most Important Details
Most often, a due diligence check for a business is required before making large transactions – buying a block of shares, mergers, acquiring a share of ownership, serious investment, or signing a contract. In jurisdictions where the relationship between market participants and any commercial activity is regulated by law, due diligence is the de facto standard, although there are no requirements for mandatory due diligence.
Due diligence in the process of M&A involves identifying and examining enough information about the target company to enable the buyer to make a decision on whether or not to acquire the target company. And if you buy, then what guarantees about possible risks in the future should you get from the seller? Both the buyer and the seller need to ensure maximum protection through contractual provisions. Depending on which jurisdiction the parties have chosen to settle their contractual relations, special attention should be paid to how the force majeure clauses are written in the documents for the M&A transaction.