Engaging in a merger or acquisition (M&A) can help your business grow, but it also requires a careful review of all the considerations at play. All parties must perform due diligence and understand the strengths and weaknesses of their intended partners or acquisition targets before entering into a transaction.
A robust due diligence process involves more than assessing the reasonableness of the sales price. It can also help verify the seller’s disclosures, confirm the target’s strategic fit, and ensure compliance with legal and regulatory frameworks — both before and after the deal closes. As M&A advisory services providers, we’ve walked many clients through this process. Here’s an overview of some key phases of due diligence.
1. Defining the scope
Before the due diligence process begins, make sure to establish clear objectives, The work during this phase should include a preliminary assessment of the target’s market position and financial statements, as well as the expected benefits of the transaction. You should also identify the inherent risks of the transaction and document how due diligence efforts will verify, measure, and mitigate the buyer’s potential exposure to these risks.
2. Conducting due diligence
The primary focus during this step is evaluating the target company’s financial statements, tax returns, legal documents, and financing structure. Additionally, scrutinize the contingent liabilities, off-balance-sheet items, and the overall quality of the company’s earnings. The M&A team should also analyze budgets and forecasts, especially if management prepared them specifically for the M&A transaction. Finally, interviews with key personnel and frontline employees can help a prospective buyer fully understand the company’s operations, culture, and value. Whether you engage external M&A advisory services or work with your current team, a thorough due diligence process is imperative to the ultimate success of the transaction.
3. Evaluating the Deal
Information gathered during due diligence, typically through a quality of earnings (QoE) report can help the parties develop the terms of the proposed transaction. For example, M&A teams can help identify and validate adjustments to EBITDA and assess the measurement of net working capital. Additionally, the M&A team unearths issues — like excessive customer turnover, significant related-party transactions, compliance matters — could warrant a lower offer price or an earnout provision (where a portion of the purchase price is contingent on whether the company meets future financial benchmarks). Likewise, cultural problems such as employee resistance to the deal or incongruence with the existing management team’s long-term vision could cause a buyer to revise the terms or walk away from the deal altogether.
4. The CPA role on your M&A Advisory Team
Comprehensive financial due diligence is the cornerstone of a successful M&A transaction. If you’re thinking about merging with a competitor or buying another company, contact our expert business advisory services team to help you gather the information needed to minimize the risks and maximize the benefits of a proposed transaction. Our CPAs specializing in M&A advisory services will understand your ultimate objective in buying a company or merging and help ensure the decisions you make during the M&A transaction process work towards your larger business goals.
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