The 5 Types of Due Diligence for M&A Success

M&A transactions are among the most complex activities a business can undertake. So it should come as no surprise that so many of them fail every year. Any business leader who has been through a failed acquisition looks back to see what went wrong with the deal. By far, the biggest culprit is incomplete due diligence. That’s why we decided to launch this blog series on mergers, acquisitions and due diligence.

It’s essential to take a holistic and strategic approach to due diligence to avoid M&A catastrophe. Why holistic? While financial due diligence is critical, it doesn’t give you a full picture of the company and industry. For instance, is the owner emotionally ready to let go of the company? Are there proposed regulatory changes that could change a growing industry to a declining one? Does the company have any legal disputes relating to HR or product liability issues?

If you want to uncover all risks, you’ll want to look at five primary types of due diligence that should be performed when contemplating an M&A transaction.

  1. Financial due diligence includes an analysis and review of the target company’s financial statements, tax returns, accounting policies, and financial trends. It serves as the starting point for your due diligence process.
  2. Legal due diligence is critical. This step requires a thorough analysis and review of corporate documents; contracts and agreements; ongoing, pending and potential litigation; environmental factors; and legal and regulatory compliance.
  3. Business due diligence requires the analysis and review of strategic and business plans, customers and products, and markets and competition. It will help you identify whether the industry is about to undergo a change and whether one customer comprises a large majority of the target’s customer base, therefore presenting risk should that customer leave subsequent to closing the transaction.
  4. Operations due diligence includes the analysis and review of the company’s technology, fixed assets and facilities, as well as real estate and insurance coverage. It also looks at whether there is any significant operational risk that affects pricing or executing the deal at all.
  5. Human Resources due diligence looks at the organization’s structure, employee benefits, management and personnel, and labor matters. For example, are there any union disputes or issues with employee non-competes?

With a strategic approach to the M&A due diligence process, your company will be far more likely to not only make a successful acquisition, but also to ensure the long-term viability of the company that emerges from the acquisition. In the coming weeks, our blog series on due diligence will provide you with a comprehensive look at the many important aspects of M&A due diligence. We’ll examine the due diligence team, M&A benefits and risks, the internal audit team, sell-side due diligence and the three phases of the due diligence process.

Is your company considering an acquisition? We can help you conduct comprehensive due diligence to reveal any risks you need to know before moving forward. Contact Ed Ryan, CPA at 703.652.1124 or please feel free to leave us a message below.

RyanSharkey, LLP’s Risk Advisory Services offers a comprehensive array of services, including internal audit outsourcing and co-sourcing, enterprise and IT risk management, and Service Organization Control (SOC) audits. We provide a personalized, partnered approach that includes direct access to our most seasoned professionals.

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Material discussed in this article is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

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