Due Diligence in Mergers and Acquisitions: Tips to Avoid Risk

February 11, 2020 - by Synoptek

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Mergers and acquisitions (M&A) take place for multiple strategic business reasons, including but not limited to diversifying products or services, gaining competitive advantage in the market, increasing capabilities, and cutting costs. However, not all M&As lead to the successful fulfillment of the set-out business objectives.

Some M&As fail due to change in a scenario – that isn’t completely in control of either the buyer or the seller. However, several M&A deals are set out for doom from the very beginning. By identifying and eliminating reasons for failures at the very beginning, organizations can increase the chances of an M&A succeeding.

Why the Due Diligence Process is Critical

The key reasons why many M&As fail are because both parties, buyer and seller, don’t complete the due diligence process before laying out their M&A strategy. The due diligence process helps the stakeholders understand the synergies and potential scalability of the businesses after the merger/acquisition.

During the process, all internal and external factors that create risk in the acquisition and focus on key factors driving profitability. Employees, processes, and patents must be carefully analyzed to draw a clearer picture of the actual business scenario. Assessing risks and opportunities through scenario planning can give richer insights than what the balance sheets will ever show.

Who Needs to Complete the Due Diligence Process?

It is usually the buyer and their external advisors that carry out the due diligence process. The process takes an average of 30-45 days, but in complex deals, it might even extend to 90 days. The external advisors could be industry experts who can study the company’s existing business model and assess future opportunities, the audit and tax experts as well as legal professionals.

It is always a wise idea to hire external/third-party professionals early in the M&A process as it provides a buffer between the buyer and seller to help sort out potential areas of conflict. The external advisors can make both the buyer and the seller aware of the reasoning behind the other party’s point-of-view in case of a conflict.

Key Steps in the Due Diligence Process

Apart from the financial and legal transactions, it is important for the buyer to gain a robust understanding of the business model of the seller; learn how the seller conducts business, work with its employees, vendors, and services providers.

A proven due-diligence process before an M&A includes 7 key steps.

1. Evaluating the Financial Matters:

This step includes evaluation of the seller’s historical financial statements, related financial metrics as well as the future projections along with the review of all material contracts and commitments of the seller, seller’s key insurance policies and income tax status (if applicable).

2. Evaluating the Technology – Along with Data Safety and Intellectual Property Stance:

This step includes evaluation of the extent and quality of the seller’s existing technology stack, analysis of its performance, and the future plans for new technology stack procurement. Along with it, two other critical pieces, the evaluation of seller’s intellectual property and its processes around cybersecurity and data privacy, need to be looked in conjunction to understand the end-to-end picture of the seller’s practices around technology management.

3. Understanding the Target Company’s Customer Base:

This step includes not only a deeper evaluation of who the existing and potential customers are but also an understating of the penetration in each target base and evaluation of the sales processes.

4. Analyzing the Cultural and Strategic Fit:

M&A is certainly more than merging only the fin-tech assets, it’s also about bringing people together to collaborate. Therefore, an analysis of the existing people’s policies, the talent of employees and other related human-resource matters become a critical part of the M&A due diligence process.

5. Reviewing the Existing, Pending, and Settled Litigations:

An overview of any litigation involving the seller is a critical piece to analyze. This may also include matters in arbitration or mediation.

6. Assessing the Compliance Standing:

This step includes evaluation of seller’s compliance with the regulatory compliance requirements, citations and notices received from government agencies since the company’s inception, and exemption from permit or license requirement if any.

7. Understanding the General Corporate Matters:

Last but not the least, a detailed review of the general corporate documentation – from information related to its subsidiaries to MoMs of the board meetings, everything must be looked into.

The Key to Success is Discipline

Thorough completion of the due diligence process enhances the quality of information available to the decision-makers and helps them ask the right questions and take the right step during the M&A process. By going through the due diligence activities honestly and with an open mind will not only help the entire process move smoothly and quickly, serving the best interests of all parties involved in the transaction.

Synoptek offers M&A Due Diligence and Planning services. Contact an expert today.