Top 5 Factors to Be Considered in M&A Due Diligence

 

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Due diligence is an extremely crucial step in case of a merger and acquisition (M&A). From the buyer’s side it helps assess if the deal is actually going to be a beneficial one and that all vital business and strategy information is disclosed to them. By factoring in these potential area issues and anticipating any upcoming concerns, the target company will be in a better position to negotiate a winning business acquisition without any hassles.

Here are some key areas that you need to look at, during the process of merger or acquisition:

1 – Financial matters

The target company needs to check if the target projects are realistic or not. Some core pointers to check include:

  1. Company performance over last three years provided by the bank statements and tax filing statements
  2. Presence of auditing on company accounts and filings
  • Margin trends of past five years
  1. Assessment of viability of the projection of future earnings and revenues
  2. Alignment of working capital definition for buyer and seller company
  3. Current situation of seats and liabilities
  • Assessment of accuracy of EBITDA calculations
  • Examination of adequate resources to cover the period of acquisition and streamlining of operations

2 – IP and technology matters

The current state of IT infrastructure and patent setup will be an influential factor to check for the reliability of the numbers that come up in M&A. Here are some points worth considering:

  1. Steps taken to protect patents and copyrights (this includes confidentiality agreements with past employees and consultants)
  2. Details about technology licenses, including granting of licenses to third parties
  • Details of open source software including third party integration and on-going issues
  1. Assessment of indemnities given to (or gotten from) third parties in cases involving IP disputes and issues

3 – Sales

A holistic view needs to be taken to enable a clear picture of actual sales landscape with full disclosure

  1. Assessment of the top 20 customers and details of their on-going project reports
  2. Examination of potential issue of customer attrition when the new entity is formed after the M&A
  • Possibility of interaction with top customers to gauge their sentiments about being associated with the company
  1. Assessment of level of refunds, cancellation of sales orders or bookings
  2. Examination of sales and revenues for the past 3 years
  3. Assessment of motivation level among the client-facing sales and marketing team and how it can be brought up to a certain level of satisfaction
  • Examination of working capital requirement that undergoes seasonal variations

4 – Strategic fit with buyer

The buyer will need to assess if the fundamental strategy outlining the existence of the buyer and the seller will align when they merge together. Some points to be factored in here include

  1. Assessment of whether the strategic fit will be based on proven results or will it be uncertain/unproven
  2. Will the line of products/services complement the overall organisation and is it lacking presently with the buying/bigger organisation
  • What will be the future of the selling company’s key people upon a successful M&A execution? How will their roles clash with the similar positioned executives in the bigger company?
  1. Assessment of the revenue enhancement that will be brought about by the M&A

5 – Management/ employee issues

The buyer will want to conduct a due diligence on the health, productivity and performance of the workforce and understand whether it will comply with the shared values of the new entity after M&A. Some important considerations here include:

  1. Assessment of any recent/on-going labor disputes. In case it is resolved, then the buyer would need to look at the summary of resolution
  2. Submission of management hierarchy and key information of the selling company
  • Agreements and details pertaining to employment, contracts, consultants, freelancers, vendors, termination and in-house personnel records
  1. Details of the wages, salaries, compensation, remuneration and fees paid to various people/third parties in the course of the business. Details should be submitted about the non-cash compensation like use of cars or properties
  2. Evidence of compliance with I-T Act for all employees

It is evident that the number of due diligence compliances to be checked is extensive. Thus for  a business it makes total sense to opt for advisory services experts like BDO in India amongst others, who help traverse the huge maze of due diligence and drive a winning M&A deal seamlessly.

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