Due diligence mergers and acquisitions

Due diligence scope

Due diligence is an important aspect of any M&A process. During due diligence (DD), an investigation is done into the company that will be acquired. The objective is to get a more detailed understanding of the company. In practice, a buyer is often looking for hidden issues or items that differ from those presented by the seller. Especially, any possible risks will need to be identified and quantified. This needs to happen before a company is finally acquired.

Download due diligence
checklist

Download an example of a due diligence checklist now for an overview.

DD when buying a business

When buying a business, due diligence is an important step. You have decided to buy the business; the valuation and the figures seem to be acceptable. Now it is time to check, visit buying a business due diligence to get more information about the acquisition you want to do and how to execute the due diligence process.

Vendor due diligence

Is it necessary to do due diligence when you want to sell a business? Visit vendor due diligence to find out why it can be beneficial. As due diligence is also related to business valuations we suggest you read valuation methods to get a better overview of the subject. If you have serious plans for selling your business, we strongly advise reading how to increase the valuation of my company to get the best possible price when closing a transaction.

Depending on the size of the company, the due diligence process can consist of various parts such as operational, financial, legal, tax etc. In a small acquisition, due diligence is sometimes carried out by the new owner in cooperation with an external accountant. In larger business acquisitions, we mostly see complete teams working on individual parts of due diligence. For the financial due diligence, often a big four accountancy firm is hired that produces a comprehensive report on the findings related to the financials of the company to be acquired.

Due diligence objectives

The main objective of the due diligence process is to become more comfortable with the acquisition of the business. Very often a buyer spends a significant amount on an acquisition. Hence, it needs to be ensured these funds are well invested and will provide a return in the future. The due diligence process is a way to make a buyer aware of unexpected items within a company. This should protect a buyer against negative surprises after the acquisition. Below is a list of objectives to be achieved during due diligence.

Some examples of due diligence objectives:

  • Find out about material issues not yet discussed with the seller
  • Due diligence reports can facilitate obtaining bank financing
  • Identify possible risks
  • Reduce the value of assets or identify hidden liabilities
  • Renegotiate the purchase agreements as made in an LOI
  • Find ways to improve the business going forward (identify possible areas for improvement)

Due diligence areas

There are many areas that can be investigated during due diligence. The research can be as extensive as possible. Some of the areas are pretty common and form a part of the majority of due diligence projects. These areas are listed here and are described separately in more detail further below.

The most important due diligence areas:

  1. Financial due diligence
  2. Operational
  3. Legal due diligence
  4. Tax
  5. HR
  6. Environmental

1. Financial due diligence

With their background in finance, CFIE's team understands the financials of companies in the industry it operates in. Checks will be performed in various areas to see how the financial ratios compare to industry averages and what this reveals about the company's operations and position in the market. For more details on financial due diligence, please visit the page financial due diligence.

2. Operational due diligence

It is very important to understand the operations of the target company to see how these fit within the structure of the buyer's company. Operational due diligence needs to be executed by people who understand the industry and have a background in it.

3. Legal due diligence

Legal due diligence needs to be part of any DD process. It is advisable to have legal experts check the company to be acquired to ensure there will be no negative surprises in the future regarding the legal structure of the company or the legal ownership of the company acquired. For more details on legal due diligence, please visit the page legal due diligence.

4. Tax due diligence

Tax due diligence is important to ensure the acquired company has complied with all historic tax obligations. All tax filings should be up to date and filled out correctly. Further, it is good to see if the current tax structure is efficient and if any negative surprises in the area of tax can be expected in the future.

5. Human Resources due diligence

People have become increasingly more important in today's businesses. Due diligence in the area of HR is now seen more frequently as part of the due diligence process than in the past. It is important to ensure that all employee contracts are correctly structured, and the company has made provisions for employee pensions. Further, due diligence in the area of HR can check on how the key employees are treated and ensure they are motivated to continue working with the new owner.

6. Environmental due diligence

For manufacturing companies or companies that have a lot of interaction with nature, environmental due diligence might take place. An investigation of legal permits to operate can be done to ensure all are in place. Further, an analysis can be done to see if improvements in the environmental area can be made.

Due diligence checklists in mergers and acquisitions

Due diligence is an important aspect of any M&A process. During due diligence, an investigation is conducted of the company that will be acquired. It is wise to use a due diligence checklist during this process if you manage the due diligence process yourself. Please download an example of a long due diligence checklist here.

Due diligence support

During the due diligence process, it is important to ensure it is being executed by industry specialists who understand the business. They know what to look for when they check if the company is of good quality and there are no hidden issues. Corporate Finance in Europe works with people with backgrounds in various industries like IT, chemical and transportation and have due diligence specialists in several other areas. Please contact us if you need support in the due diligence process.

As due diligence is a small but important part of the M&A process, additional information about the entire process can give a better overview. Visit buy a business process or sell a business process to get a clearer picture.