Acquisitions: Due diligence

Due diligence lays the foundation for a good deal

Due diligence is an important and critical phase in business acquisitions to ensure that the deal is sound and based on correct assumptions. Due diligence involves a comprehensive examination of the commercial, financial, legal and operational aspects of the target company. The objective is to identify risks and opportunities and to verify that the assumptions made about the target company are correct.

Why Due Diligence is Important?

Due diligence helps the buyer gain a deeper understanding of the target company's business and identify potential risks and opportunities. This review also provides an opportunity to confirm that the valuation as well as the terms of the deal are based on accurate information.

External advisors and in-house experts

The use of external advisors with specialist expertise is often necessary to ensure well-conducted, appropriate and tailor-made due diligence. These advisors may include financial advisors, legal professionals, tax advisors, and technical experts. In recent years, the scope for due diligence has been broadened and it is now common for examination of, for example, CSR and sales and marketing to be included in a due diligence. In addition, background checks and security checks are becoming more common depending on the company and industry. In addition to external advisors, it is also important to include employees from the acquiring company in the acquisition process. They often possess valuable industry expertise and their involvement can facilitate future integration efforts by giving them an early insight into the operations of the target company.

Focus Areas of Due Diligence

The due diligence process may vary depending on the target company's business and industry, but there are several common areas of focus that should be reviewed:

Market and Commercial Review

The commercial due diligence analyses the target company's market position, customer base, competitive landscape and future growth opportunities along with addressable market. It is important to understand the dynamics of the market and identify potential risks and opportunities.

Financial Due Diligence

Financial due diligence involves a detailed analysis and review of the target company's financial history, cash flows, liabilities and assets. The objective is to verify the financial position of the target company and ensure that there are no hidden financial risks.

Legal due diligence

The legal due diligence process includes a review of relevant agreements, licenses, IP rights, litigation and other legal obligations along with GDPR compliance. This helps identify potential legal risks and ensure that the target company complies with all laws and regulations.

Operational due diligence

Operational due diligence focuses primarily on the target company's business processes, sales and marketing, production capacity, supply chain and logistics. It is important to understand how efficient and competitive the target company's operations are and what opportunities for improvement exist.

IT and technology

An audit of the target company's IT systems and technical infrastructure is essential to identify possible technical risks and investment needs. This includes, among other things, an analysis of IT security, system integration and technical capabilities and bottlenecks.

Taxes

The tax audit ensures that the target company complies with all tax rules and regulations. This includes, among other things, a review of historical tax returns, tax payments and potential tax risks.

HR and Human Resources

The HR audit includes an analysis of the target company's personnel, employment contracts, personnel policy and culture along with any employment law issues. This helps to identify risks and opportunities related to personnel and work environment.

CSR

A review of environmental and sustainability aspects is important to identify possible environmental risks and ensure that the target company complies with relevant environmental rules and sustainability standards, as well as the potential for improvement.

Intellectual Property Review and IP Rights

This review focuses on the target company's intangible assets, such as patents, trademarks, and copyrights. It is important to ensure that all intellectual property rights are protected and properly registered.

Due diligence is a comprehensive and important part of the acquisition process that helps ensure that the deal is well-founded and that material risks and opportunities are identified. By employing both external advisors and involving internal experts, the acquiring company increases the opportunity to gain a comprehensive picture of the target company and its operations and thus the possibilities for making informed decisions. Regardless of your industry and business, it is important to conduct a thorough and tailored due diligence to ensure a successful business acquisition.

At FLB Partners, we offer expertise and support throughout the acquisition process, from strategic planning to integration. Contact us today to discuss how we can help your company with the acquisition process.