Purchasing a business involves a certain level of uncertainty for the acquirer. Before committing to the transaction, it is important for an acquirer to know they will achieve the most desirable value from the deal. An efficient and effective due diligence process provides visibility of the opportunities, advantages and risks associated with the purchase apparent to the acquirer, enabling them to make informed decisions.
What is due diligence?
Acquisition due diligence is a process of investigation, enquiry and verification of an investment opportunity. It is a risk assessment and mitigation process that involves undertaking critical analysis prior to an acquisition or investment to minimise undisclosed issues or risks associated with the transaction. A thorough understanding of potential risks and opportunities will enable an acquirer to gain greater insight into the potential value of the transaction and assist establishing the appropriate offer price and terms for the deal during the negotiation process. In certain cases, it also helps to refine the acquisition consideration paid for a target after acquisition.
The financial due diligence process involves validating the assumptions and strategic proposition for the transaction, analysing historic financial information projected profits, and cash flows, and reviewing revenue, taxes, and other financial requirements that may affect deal negotiations.
The due diligence process begins with understanding the reasoning behind the proposed investment and focusing on key areas of concern that are paramount to the acquirer in the decision-making process.
Once an acquirer has decided to initialise the due diligence process, a dataroom is set up as a medium for the seller to provide information relating to their business in a confidential and controlled manner.
This information is then reviewed, with relevant observations and recommendations summarised in a due diligence report. This report will highlight areas of concern, provide observations, draw conclusions, and recommendations. Typically, financial due diligence provides a view of historical and forecast earnings and cash flows, working capital trends, unrecorded contingencies, fixed asset quality, taxation issues and opportunities, capital expenditures, and key financial terms of existing contracts. In can also cover observations over the management team as well as IT systems and process.
The importance of due diligence
Transactions that undergo a due diligence process offer a higher chance of success. A review of a target’s underlying earnings and current trading performance will help decision makers estimate the potential increase in value and/or revenue post the deal.
In addition, it assists in the identification of any undisclosed liabilities which may result in amendments to the proposed transaction structure or purchase price. It also gives the acquirer the opportunity to review or withdraw from the deal if serious risks are found.
It assists in the verification of financial projections thereby aiding the acquirer to understand drivers of historic and projected profits and cash flows and key issues facing a target business. This helps in the analysis of potential synergies and trends.
Finally, a comprehensive due diligence process equips the acquirer to invest with confidence. It is key for acquirers to be aware of the risks involved and to know the level of risk that they are willing to take on.
At HLB Mann Judd we understand the impact of an effective due diligence report in the deal making process. Therefore, we ensure that we not only quantify the impact of risks and opportunities, but also focus on areas that are most important to the acquirer. Our team has extensive experience in assisting acquirers through the process.