All M&A transactions involve a large amount of due diligence. This is "due diligence", i.e. taking prudent measures when faced with a potential investment. It is a profound process of analysis e assessment of information and documents of a company.
Transactions that go through proper due diligence offer greater chances of success by improving the quality of data available to each decision maker. It is through due diligence that interested parties confirm information such as contracts, finances and customers. Thus, in possession of a better overview of the factors that may contribute to the success of the operation, the risks involved are eliminated or mitigated.
In acquisitions, due diligence allows the buyer to feel more comfortable that his expectations regarding the transaction are correct. However, they can also offer benefits to the seller, as rigorous financial examination can reveal that the market value of the target company is higher than initially thought. Therefore, it is not uncommon for sellers to prepare due diligence reports before possible transactions.
What are the costs of Due Diligence?
The costs of undergoing a due diligence process depend on the scope and duration of the process, which vary according to the complexity of the target company.
In general, the parties involved in the business determine who will bear the expenses of due diligence. Both the buyer and seller need teams of analysts, accountants, lawyers and other consultants for the success of the transaction.
What aspects of a company are subject to Due Diligence in an M&A transaction?
The most recurring due diligence processes refer to accounting and financial, tax, labor and legal analyses. Anti-corruption due diligence is also in evidence, due to the new Brazilian and international laws.
Understanding the business objectives behind the acquisition is essential. This understanding will help the team prioritize the due diligence effort and determine what information is important to review and what can be ignored.
The steps of Due Diligence
Due diligence in an M&A transaction is a process that involves several parties, such as
- Evaluation of project goals: the first step sets the corporate goals. This helps to identify the necessary resources, what needs to be collected and finally ensure alignment with the company strategy.
- Analysis of business financial dataThis step is a comprehensive audit of financial records. It helps to assess the integrity of the company's assets, evaluates performance and overall financial stability and detects any warning signs.
- Complete inspection of documentsThe buyer requests the respective documents to audit, conducts interviews or research with the seller and makes site visits. Responsiveness and organization of the seller are essential to speed up this process. Otherwise, you can create a tough experience for the buyer.
The buyer then examines the information collected to ensure proper business practices as well as legal and environmental compliance. This is the main part of the due diligence process.
- Analysis of the business plan and model: Here, the buyer specifically analyzes the plans and business model of the target company. It assesses whether the transaction is feasible and to what extent the model of the target company integrates with that of the acquiring company.
- Final training of the offer: After information and documents are gathered and examined, individuals and teams collaborate to share and evaluate their findings. Analysts use the information collected to perform evaluation techniques and methods.
- Risk ManagementRisk management analyzes the target company holistically and assesses risks that may be associated with the transaction.
Thus, when going through the due diligence process in an M&A transaction, there may or may not be the confirmation of the transaction, and with the information acquired finally start the integration of the companies involved.