Due Diligence in M&A Transactions
February 20, 2018
Due Diligence refers to the careful, systematic and detailed collection, review and analysis of data of an investment, acquisition or merger candidate or the disclosure of the data by the target object.
Due diligence may be conducted by the buyer and/or the seller of the company or the stake. In addition to enabling the purchase or sale decision, it also serves to determine the behavior and the demands in the subsequent purchase or sale negotiations. It can be taken over by the company itself or on its behalf by a specialized accounting and legal firm.
Due diligence takes about one to three months and is usually organized in phases to reduce the information burden in the event of a negative assessment. It starts with a rough analysis (screening) and in case of a positive assessment continues with a detailed analysis. In this phase, intensive discussions are also held with the management ,along with site visits. The results of the due diligence will be stated in a final report.
Due diligence goes well beyond the formal audit of, for example, the annual accounts or the books. The content and scope of due diligence vary individually. Below are some of the subdivisions of due diligence:
- Legal aspects: Legal due diligence includes, in addition to the analysis of ownership, the examination of company records, commercial registration, the terms of the articles of association, contracts and agreements concluded by the company, employment and business matters, and possible or ongoing litigation and official procedures. For this usually a legal advisor is consulted.
- Tax aspects: Tax due diligence deals with tax and accounting matters, including accounting policy, outstanding tax payments, tax risks and the tax implications of the transaction structure.
- Financial position and reporting: Financial due diligence essentially corresponds to an analysis of internal and external accounting and controlling to assess the financial situation. The information is derived mainly from the balance sheet, profit and loss statement and cash flow statement. This also includes an analysis of the accounting policy, quality of reporting, transparency in reporting, financial structure, assets, liabilities, capital structure, liquidity, financing options and costs.
- Market position and future development: Business opportunity or market due diligence assesses current strategic aspects such as the quality of the core business, position within the industry, the patent situation and the selling proposition. Together with this, an attempt is made to estimate the future developments of the market, possible opportunities and risks.
- Human Resource Aspects: Management due diligence assesses the quality of the management team in terms of professional training, experience and credentials.
- Divestment options: Exit due diligence plays an important role. It analyzes the exit options and under what conditions they are available.
- Other content: This may include, but is not limited to, a background check on local business partners, environmental matters and strategic matters.
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