Due Diligence in Mergers and Acquisitions: A Beginner’s Guide to the Top Five Areas of Interest
Due diligence by potential buyers takes up a serious amount of time in any M&A process. Essentially, it’s designed to make sure the buyer knows exactly what it is that they’re buying – and in other cases, ‘reverse diligence’ helps the target company understand whether a potential buyer or merger partner is right for them.
But what does due diligence cover, in a nutshell? Here are the top five areas of interest in the due diligence process, regardless of sector or size of business.
- Strategic ‘Fit’
How well would the target company fit into the wider strategic plan of the buyer? The buyer and their team will also want to check exactly what any pre-existing perception of ‘fit’ is based on.
The buyer needs to be aware of the company’s historical financial statements and metrics, as well as checking that any predictions for future performance are reasonable. This is a detailed process par excellence, but one that your company can be ready for if your financial house is all in order beforehand.
- I.P. and Technology
The extent and quality of the company’s I.P. and technologies need to be determined here, covering areas such as patents, I.P. protection measures, trademarks and service marks, trade secrets and their safety, copyrighted products or materials, I.P.-related disputes, licenses granted to third-party companies, any open-source software issues and so on.
- Sales and Customers
The company’s customer base and the sales pipeline need to be fully understood by the buyer, as well as customer satisfaction, the concentration of customers, sales terms and policies, the motivation of the sales team and any seasonality issues amongst other criteria.
- Material Contracts
This is one of the most time-consuming aspects of the due diligence process, but it’s absolutely critical to the success or otherwise of the deal. Here, the buyer will want to review and understand contracts around credit arrangements, loans, customers and suppliers, settlement agreements, equipment leases, employment, exclusivity, physical property, unions and much more besides.
There are many more areas that are looked at during due diligence, but preparing well for these top five categories of interest will help equip your company for a smoother, more successful deal. Due diligence can take a long time, and you’ll be able to hold your nerves a lot better if you feel you’ve prepared well and that all the necessary information is in place for potential buyers and their teams to examine.
If you’re considering selling your company, take a long hard look at these five areas and reality-check as to whether you need to do a lot more work before making yourself open to this very high level of scrutiny.
Great preparation makes for easier due diligence – and better deals!