Due diligence is basically the evaluation of the financial, business, and legal risks attached to an acquisition or merger. It’s completely recommended and right for transacting parties to carry out a due diligence on everything associated with a transaction, irrespective of the nature of the deal and whether there’s selling, merging, or buying involved. In this article, we’ll try to understand when and how the top due diligence firms perform their role and what they review.
When to Perform Due Diligence?
Due diligence begins right when you meet a candidate for a professional amalgamation, even when the review of the firm’s data has just begun. At every step, you must assess whether the firm would meet your firm’s business and financial goals. But there’s a particular intensive review you must undertake, which is called field due diligence. Quite often, companies resort to this diligence approach much quicker in their process.
Companies must wait for an agreement on deal terms before performing due diligence. First, it’s important to review how the terms would impact the deal’s objectives; this is something that cannot be done without knowing the terms. Second point, field due diligence is invasive and could result in an imminent transaction’s premature disclosure. There is just no need to take that plunge until you’re extremely certain about a deal’s viability. Third, field due diligence entails a lot of effort and time to pull the information together. The entire exercise would be a colossal wastage of time and effort if nothing ends up worthwhile.
Things to Review
In a due diligence, you must ascertain what legal and financial risks there are to an acquisition or merger. Usually, you would be reviewing past financial information, employee and owner details, specific material clients and client categories, benefit plans, service methodologies, procedures, policies, legal matters like licensing and litigation, quality-control system, and the state of assets on the verge of being acquired.
Most firms do not pay sufficient attention to business risks. Each merger participant works as per a business plan. The other side could bring to light praiseworthy credentials and may still not be capable of meeting the deal’s objectives. Look into the assumptions you’ve made regarding the ability of the other side to deliver the plan, and later try confirming if the assumptions could be relied upon.
The initial step when starting due diligence is exchanging lists of things each side would want to witness. To manage priorities and time, the review should be broken down into categories based on how easily the information can be accessed and delivered.
