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Mergers and acquisitions due diligence is an examination of a potential target company’s management, operations, financial position, and prospects that are conducted prior to an acquisition. The purpose of due diligence is to help the investor make an informed decision as to whether or not to proceed with the acquisition. Due diligence is typically divided into three categories: legal, financial and operational.
Legal due diligence is the most important component of M&A due diligence. It involves an examination of the companys past, current and future legal matters, such as patent and other intellectual property assets and rights, employment, taxation and licensing issues. This is also where potential liabilities, such as legal proceedings and pending litigation, will be identified. Additionally, legal due diligence is used to evaluate the companys current contracts, corporate documents, leases, loan agreements and other material contracts.
Financial due diligence involves a detailed review of the companys financial statements and records. This includes assessing the quality of the past and current financial information, understanding the key trends and ratios and evaluating the impact of all important financial transactions, such as loans and financing. The financial due diligence also evaluates any contingent liabilities such as lawsuits and pending litigation that might impact the companys assets and net worth.
Operational due diligence is the third component and is aimed at understanding the companys operations, core competencies, suppliers, customer and other relationships. This includes insight into the company’s internal processes, controls, technology resources and management team. Specifically, operational due diligence evaluates the companys strategic plan and growth prospects, IT systems and operations, customer agreements, quality controls and assurance and regulatory compliance.
Ultimately, the goal of M&A due diligence is to help investors make informed decisions and access the potential value of a transaction. It is designed to provide investors with a full picture of the companys financial, operational and legal characteristics that could affect the potential success of an acquisition. Due diligence also helps to reduce potential risks and unearth any potential liabilities that could impact the success of a deal.
