When considering a merger or acquisition of another business, an inevitable part of getting to the closing table is going through due diligence. Due diligence is the part of the process where the acquiring firm can analyze all the qualitative data that makes up a firm, and assess the non-qualitative information that could cause a transaction to easily succeed or fail upon closing. If you want to ensure any business you’re interested in acquiring matches your company’s acquisition goals, it’s the perfect time to learn more about the ins and outs of due diligence.
The Importance of Due Diligence
The due diligence stage of a business acquisition is typically the make-it or break-it point of a transaction. For example, a recent study by the Harvard Business Review determined between 70-90% of all acquisition transactions fail before they get to the closing table, with insufficient due diligence process efforts being a top reason for this failure.
To avoid passing the due diligence stage only to later realize the company you want to acquire doesn’t match your goals, use the due diligence stage to identify red and yellow flags that could close or possibly kill the M&A deal. Since due diligence can allow you to dig into the target firm and find areas of concern before you fully commit to the purchase, it’s an incredibly important part of any acquisition.
Questions to Ask Before You Begin the M&A Due Diligence Process
Due diligence is a time-consuming process, but you can cut down on wasted time by knowing what questions to ask before you start. As you consider leading a due diligence effort, it’s crucial to decide the following before you begin the due diligence process in any merger or acquisition:
- Do we have all the required expertise? If so, do they have the capacity needed?
- Who is responsible for the overall process? Who should be tasked with overseeing each component?
- What areas of due diligence are of key concern for leadership and C-suite executives?
- What type of deliverable do we need to produce from the due diligence process to present to the Board of Directors or others?
- What are the timing expectations?
- How will you and your team handle non-responsiveness or lack of data?
- Are there any direct or indirect “deal breakers” to be on the lookout for?
These questions will help your team focus their efforts purposefully during due diligence, and will ensure the target firm both matches your values/goals and fits your overarching business growth strategy.
What Does a Due Diligence Structure Look Like?
Before you begin due diligence, familiarize yourself with the standard M&A due diligence structure listed below:
While you can use a standard due diligence structure to get started, it’s important to know that the structure will likely need to be customized to meet the acquirer’s requirements and leadership’s key areas of interest. This need for a personalized structure could mean due diligence begins with the standard structure, and some items are removed as they are deemed insignificant to the acquirer. Alternatively, it could also become apparent that some items need to be added once deemed significant to the transaction.
What to Expect During the Due Diligence Process
Throughout due diligence, key documents and information will be shared to help gain comfort around each area of key concern for the acquiring firm. Due diligence is typically performed through various methodologies, such as inquiry of key leadership, observation of various processes, and inspection of key documents provided by the acquiree.
It is important to note that performing due diligence is not the same as conducting an audit, regardless of who you engage to perform the due diligence. While similar procedures are used to gain comfort around key areas in both due diligence and during an audit, an audit is governed by various standards boards, and is fundamentally different than due diligence review.
As the key areas are reviewed during due diligence, it is not uncommon to come across items that can be considered a concern to the buyer. These concerns can range from client concentration issues, key employee retention concerns, concerns around the validity of financials, and everything in between.
Due diligence during a potential M&A transaction is very specific to the acquisition itself. For example, concern for one potential buyer might not be the same concern for another potential buyer, depending on the buyer firm and their end acquisition goals. The purpose of due diligence is to identify any areas of concern so leadership can determine if possible acquisition problems are legitimate, and identify how those concerns should be handled more effectively.
Choose Thinc Strategy for Merger and Acquisition Advisory Services
At Thinc Strategy, we’re happy to guide you through due diligence and the entire M&A transaction process. Our team of certified merger and acquisition advisors can help you craft your acquisition goals, identify key areas of concern for due diligence, and serve as your company’s personal development consultant. Throughout the entire time working with us, we’ll focus on maximizing your value for a successful transition.