Business Blog Series: Why Is Due Diligence in Mergers and Acquisitions Important?
Due diligence is a part of our everyday lives, from applying for a loan to getting a job, a certain level of homework is required. However, most of the time, due diligence is one-sided because, in a lot of cases, it is a single party that carries it out.
That should not be so when you are conducting due diligence on a merger and acquisition. Both parties should proactively conduct due diligence and here is the importance and benefits of heeding this advice:
What is due diligence in mergers and acquisitions?
Due diligence in mergers and acquisitions can aptly be described as doing homework on the prospective buyer or seller of a business. If you are merging two companies, the process remains the same. The only difference is that you will be doing it on the person or company you’ll be merging with.
There are a variety of details you might want to get straight before continuing with that deal. Therefore, you should find out details such as the other party’s approach in business, financial capacity, and other details, depending on the type of acquisition or merger.
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Why is due diligence important from a buyer’s perspective?
If you are the one making the offer to acquire a business, due diligence is even more important. You need each piece of detail about the company operations and especially its financial history.
It is important to know how the company has been performing and why it has been receiving the revenue detailed on company statements. If you do not understand these important details, the business might fail under your command. Before throwing in a lot of money into a business acquisition, ensure that you understand every little detail.
The importance of due diligence from a seller’s perspective
When you are the one selling your business, due diligence is also very important. You must strive to understand the other party in great detail. Try to figure out why he would like to buy your business. That can be done by examining previous business activity.
It is important because sometimes a competitor might pose as a buyer just to get a front seat row when you reveal company secrets that kept you competitive. Also, due diligence is important because you should know whether a potential buyer has the financial capacity to make a purchase or not.
How do both parties benefit?
When both parties conduct proper due diligence, the merger or acquisition will be a seamless process. All dominoes will fall into position and the business being merged or acquired will be in the best hands available. Due diligence will also help connect business people with the same mindset and goals for incredible mergers.
The entire process will be transparent, a lot of time will be saved and either party will get what they wanted. Also, company secrets will be safeguarded from competitors that pose as buyers just to get information.
Conducting due diligence
When you are conducting due diligence, you should feel free to ask questions and ask for verification of any claims made. Try to understand the following when conducting due diligence:
- Financial capacity or history
- Business operations and owner’s resume
- Sales figures
- Historical and projected cashflow
- Target market
- Marketing strategies
- Patents and other intellectual property
- Production capacity
- Legal issues
These points are generic matters you should consider but there might be more specified information you need to get when conducting due diligence in your industry.