A Guide to Due Diligence Issues in Mergers and Acquisitions

A Guide to Due Diligence Issues in Mergers and Acquisitions

Forewarned is forearmed. Information is valuable, whether it’s used in field battles, competitions, or corporate mergers.

Having accurate data and analysis is invaluable in making sound decisions and creating a plan to advance a company’s success.

Acquiring companies usually invest in AI due diligence to efficiently manage data and give decision-makers more time to analyze it. However, some challenges will arise as the transaction progresses.

With that said, this article will discuss the issues that will arise as two companies merge in modern times and avoid costly mistakes.

What are Mergers and Acquisitions?

Mergers and acquisitions (also called M&A) are a series of complex and multi-structured agreements between two companies combining in some form. It can either be statutory, subsidiary, or consolidation.

The usual reasons companies merge are either they want a more significant market share, diversifying industries, tax benefits, and higher sales.

Because of a merger’s intricate nature, even the smallest detail can mean success or failure in the deals.  Current M&A controversies have led acquiring businesses to invest in due diligence.

Quick Overview of Due Diligence

Due diligence is an intensive process of investigating, verifying, and auditing a target company to all documents, relevant facts, and financial statements presented in the investment process. 

This allows the acquiring company to make informed decisions by having a complete and thorough analysis and verification of the company. Due diligence can be done by a special internal committee or a third-party agency.

With vast data and documents to process, secure virtual data rooms (VDRs) are created for efficiency.

Meanwhile, in due diligence, AI can be installed to organize data and provide more time for analysis. In the process of due diligence, specific issues will arise that can potentially hurt transactions.

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With that said, here is a guide on the due diligence issues that can transpire in an M&A.

Financial Statements

This is a top priority for any M&A.  Target companies need to present audited annual, quarterly, and monthly financial statements.

This is to see how much income it currently generates. Due diligence will also need to verify if the sales projections are realistic and doable in the prescribed time.  

Apart from generating reports, there is also a need to confirm how much capital will be needed to keep the business running and what investments should be made. This is to see if the normalized working capital can be shouldered by the acquiring company.

Lastly, due diligence also needs to see the liabilities and outstanding payables a target company has. Sometimes target companies do not disclose this to avoid merger breakdowns. This reveals the actual cost of merging or getting a company.

Income and Customer Base

Apart from the financial statements, one of the other critical concerns of the sales and marketing department is knowing what work lies ahead of them.

This may not sound wholly related, but having a stable influx of customers can ease the financial impact, especially for acquisitions.  It can also ensure business continuity and generate sales while restructuring.

Knowing customer satisfaction and backlogs can determine how much budget needs to be pumped into the target company.  Another issue that requires research if customers will have no problems with the new owners can affect business relations.

On top of that, issues on sales terms and refunds need to be presented to prepare process improvements upon a successful deal.

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Human Resources and Management

In getting a business, the people working in it are critical in keeping the company alive while it is in transition.  Office culture and management are essential to know since they are the ones who will generate the desired output.

Knowing the organizational chart is essential to see if it matches the acquiring business’ organization. This can expose redundancies or workforce blind spots to improve upon acquisition or merging.

Having a clear report on any labor disputes, lawsuits, and violations is also vital because aside from morale and productivity, it is also bad for public relations. 

Financial matters like salaries, commissions, and other incentives are essential to managing monthly cash flow as well.

Technology and Intellectual Property

The current state of technology, research, and intellectual property are vital things for due diligence too. It will give an overview of the intangible assets the company has. Sometimes, there are several main reasons that the deal started at all.

Having a new company can mean having access to its domestic and foreign patents, trademarks, and copyrighted materials and if these are legally protected.  

The target company should also disclose historical arrangements of its intellectual properties, such as exclusive license grants or disclosing source or object code.

Most importantly, check if there are legal restraints on the intellectual property to prevent that new business from using or distributing it. Having a thorough evaluation will avoid unwanted surprises and unforeseen costs upon closing the deal.

Cybersecurity and Data Privacy

Protecting confidential documents and information is critical to any business. In a time when vulnerable data can be easily hacked and sold to interested buyers, ensuring due diligence when it comes to cybersecurity and data privacy should be a priority. 

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This will provide an idea of how much investment is needed to safeguard sensitive information. First and foremost, there is a need to see what risks the target company has according to its industry, location, and even its supply chain.

Understanding the data system and network will also give an idea of how to manage the target company’s data as well. Knowing if there is a history of system breach and cybersecurity incidents will also provide an overview of how they handle data.

Conclusion

These are just the top issues that need to be checked in the process of due diligence. However, the bigger the company, the more details that need to be researched.

Due diligence gives decision-makers an overview of what to expect. It gives them time to plan accordingly and see if it is worth it.

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