Mergers and acquisitions (M&A) operations undergo some due diligence processes. Although in market jargon the term is used in English, in Portuguese it can be translated as due diligence, something that allows a potential buyer or investor to obtain more information about the company that will be purchased before finalizing the transaction or investment.
This is a fundamental step in any large transaction or investment – including in the context of mergers and acquisitions (M&A).
What is the due diligence process for?
Professionals involved in negotiating the purchase or investment of the company – usually a multidisciplinary team of a consultancy specializing in the subject – usually prepare a comprehensive checklist before starting the structuring of the deal. This includes, for example, reviewing the target company’s assets and liabilities, structure, operations and key business relationships. This information allows the investor to effectively assess the commercial and strategic potential of the business.
At the other end of the negotiation, professionals representing the seller need to organize a series of documents to be presented in the process. In addition, it is up to these professionals to manage the process so that the company’s administrators continue to manage the business.
Below are 10 areas that the due diligence process should cover:
- Legal
The legal risks of the company to be purchased or invested in are collected and evaluated to obtain information about its legitimacy and viability. Any and all disputes, authorizations, licenses and agreements are considered.
- Commercial
This part of the due diligence allows the potential buyer or investor to better understand the strength and commercial appeal of the target company. Business due diligence assesses the organization’s current and potential market. This report typically includes key customers, competitors, and business policies.
- Financial
Financial information includes the company’s revenue to be purchased or invested in, earnings, financial assets and their risks. This aspect of due diligence gives potential buyers and investors a clear picture of the organization’s market value. It also provides a perspective on the company’s financial stability and growth capacity.
- Human Resources
Mergers and acquisitions combine two different corporate cultures and bring different workforces together to create value and innovation. It is important that, during due diligence, the target company provides substantial information about employees and current HR policies. This helps teams plan how to effectively combine the two cultures. A business acquisition due diligence checklist typically reveals employee contracts, agreements, and a summary of current recruiting initiatives.
- Intellectual property
Intellectual property is one of the key aspects of a company that is bought or invested in because it can create immense value for the business. It is customary to verify patents, trademarks and digital domains.
- Information Technology
Completing the IT audit provides meaningful insight into the company’s key initiatives and projects. It includes a detailed description of its main policies, practices, resources and potential threats to information security. In the age of digital transformation, collecting this information efficiently can be vital.
- Environment, health and safety
In a merger, acquisition or investment process, it is important to assess the risks related to the environment, health and safety. This allows for M&A discussions with an environmental conscience, a topic that has been gaining more and more attention from the market. Target companies must provide information about past and current environmental, health or safety responsibilities, investigations or citations.
- Taxes
The tax due diligence checklist may include property taxes, tax assets, audits, and any overseas activities. Target companies must provide extensive documentation of their tax history to prove their legality, legitimacy and viability.
- Marketing
Copies of any strategic, marketing, or publicity plans, summary of anticipated new product launches, product enhancements, copies of all presentation brochures, sales papers, and other publicity and marketing materials, may be included on the due diligence list. as well as product descriptions and summary of marketing risks and opportunities.
- Compliance and regulatory issues
The request includes a summary of the target company’s compliance program and copies of all policies, procedures, and other related documentation.
Documents that must be submitted in the due diligence process include any paperwork, research, or information necessary for evaluating buyers and investors. Shareholder agreements, government audits, trademarks, customer agreements and license agreements are different types of due diligence documents, to name a few.
It is important to note that when it comes to due diligence documents, it is essential to be thorough. After all, the information collected during the process helps determine whether a deal is valuable or not.
