Due Diligence in M&A transactions
Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Our Corporate & Commercial Law Solicitor, Arvin Bissessur will be covering why due diligence is important in mergers and acquisitions process in today’s newsletter.
What is Due Diligence?
Due diligence is an investigation process to confirm all facts are accurate. Within mergers and acquisitions (M&A), Due Diligence refers to the investigation into a target company before completing a transaction. This process is carried out by the buyer and will help to confirm the value of the target company and identify any potential risks and liabilities.
Due Diligence often includes a review of the target company’s financial statements, formal and legal documents, management and senior employees, as well as an analysis of the target company’s market and industry. The level of Due Diligence will be dependent on the size, complexity and length of the transaction as well as the commercial considerations of the parties involved.
Why is Due Diligence important in M&A?
Due Diligence in M&A is important for several reasons:
Identifying risks and liabilities in the target company, such as outstanding claims or unpaid taxes, which allows the buyer to make an informed decision on proceeding with the transaction and negotiate more favourable terms, if necessary.
Evaluating the value of the target company through its financial and operational performance. This helps the buyer ensure the purchase price is fair.
Ensuring the target company complies with all relevant laws and regulations, which can help protect the buyer from potential legal and financial repercussions.
By having a clear understanding of the target company’s operations, Due Diligence can also help to mitigate post-completion surprises, which can be costly and disruptive for the buyer if they are unable to plan accordingly.
Due Diligence can also help identify potential opportunities for growth or cost savings and justify the transaction for the buyer and increase the potential return on investment.
How do buyers carry out Due Diligence in an M&A transaction?
There are several steps the buyer can take when conducting Due Diligence
Create a data room or online portal where the buyer can access and review all relevant documents about the target company. This will make the Due Diligence process more efficient and organised.
Collect all relevant financial and legal documents of the target company. This can include financial statements, tax returns, business contracts and intellectual property records. This should extend to also collecting the target company’s business and marketing communications, such as brochures, presentations, and website materials, to ensure they are accurate and consistent with the information uncovered in the Due Diligence process.
Identify key issues or potential risks that the target company has and prepare a plan to address them.
Identify key personnel who will be involved in the Due Diligence process and ensure they are available to answer any questions or provide additional information as needed. This may be through a legal representative or authorised agent.
Prepare a Due Diligence checklist of all the information and documents the buyer will need to review as part of the process. This will help to ensure nothing is overlooked.
Assemble the right team of experts to deal with the Due Diligence process, such as lawyers, accountants, industry experts and specialised consultants, to assist and provide guidance.
By taking these steps, the buyer can ensure the Due Diligence process runs smoothly and that they have all the information they need to make an informed decision.
What happens after Due Diligence in M&A?
If Due Diligence is successful, the buyer will be in a better position to satisfy themselves with the value of the target company. The buyer may wish to proceed to completion or renegotiate the price and terms to account for any issues arising from the Due Diligence process. Walking away from the deal should also be considered a valid option if the buyer is not satisfied the deal is worthwhile.
In the agreement between the buyer and seller, the purchase price and terms will be set out and will typically include representations, warranties and covenants given by the seller regarding the target company’s condition and operation, as well as indemnification and closing provisions. These terms will often derive or be strengthened from the information gathered in the Due Diligence process.
What is the difference between disclosure and Due Diligence in M&A?
In M&A transactions, disclosure and Due Diligence are two distinct but related processes.
Disclosure refers to the process of the seller providing relevant documents and information about the target company to the buyer. The buyer will want the seller to disclose all material facts relevant to the value or operation of the target company and represent that the target company is compliant with relevant laws and regulations. Examples of the documents and information disclosed include financial statements, legal documents and business contracts of the target company.
On the other hand, Due Diligence refers to the process of investigating the documents and information provided by the seller. The buyer will have an opportunity to identify any potential risks and liabilities and they must verify and satisfy themselves that the material facts justify the value of the target company.
Briefly, disclosure is the process of providing information, whereas Due Diligence is the process of investigating and verifying that information to confirm its accuracy and completeness.
How can Dragon Argent help you with Due Diligence?
Dragon Argent is comprised of experienced lawyers, accountants, and M&A advisors well-equipped to handle the Due Diligence process. We can assist and represent you in your M&A deals, ensuring all your needs and objectives are met. Schedule a call with one of our M&A transaction advisors today to discuss the prospective sale of your business.
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