Due diligence is a crucial part of any transaction and helps all the parties involved to ascertain the fit and feasibility of the transaction. It enables everyone to understand the risks involved, reduce their exposure and make informed decisions. Due diligence is done during mergers and acquisitions, before hiring for key positions, while onboarding new clients or before engaging in any kind of important business relationships. Read more about this subject in our earlier piece on corporate due diligence and why it is important.
The due diligence process can take different forms depending on its purpose. A company that is considering a merger or acquisition would want to perform a financial analysis of the target company. It might also include an analysis of future growth. Due diligence can be categorised as “hard” or “soft” due diligence; hard due diligence is concerned with financial statements whereas soft due diligence is concerned with people within the company and its client base.
When conducting due diligence, these are the ten target areas that must be verified.
Company Overview: Looks into the business model, business sustainability, competition and financial overview to understand the overall functioning of the business.
Financials: It is imperative to understand the revenue flow and sources of revenue. A company having a major chunk of revenue coming in from a single client can be a potential risk that must be taken into account. Projections for the upcoming years and resource allocation can help the other party plan for the transaction.
Intellectual Property: Patents or trademarks owned by the company are an indication of its strengths. Is it imperative that the other party be informed of such intellectual property. In certain cases, the other party must also be aware in case of any copyright infringement.
Target Audience: This helps understand what the current target audience of the company is. It enables the other party to forecast what market changes could disrupt its market and where the company stands in terms of market leadership.
Management & Workforce: One might want to look into the employee turnover rate, employee life cycle and management structure. Getting a deep understanding into whether the company faced any labour issues and how they went about solving it is important when ascertaining the management’s attitude towards its people. In mergers and acquisitions, a cultural merger plays a key role in determining the success of the transaction. Cultural mismatch and management issues were the main drivers of failure in the Time Warner and AOL acquisition.
Litigations: In order to answer questions on the strength of the memorandum of association, contractual agreements, existing non-disclosures or non-competes, pending litigations, one must look into legalities as part of the due diligence process. These facts give the client, acquirer or potential partner an insight into the legal standing of the company.
Production: If two companies intend to merge operations or utilise the others production capacity, looking into production is imperative as it involves a deep understanding of the companies facilities, turnaround time, cost, procurement etc.
Marketing: A dive into marketing operations helps the other party know about the current communications in place, marketing messaging, channels, goals, strategies and outcomes. In the merger of Snapple and Quaker Oats, a lack of understanding of the marketing led to a failure of the deal.
Environmental Issues: Environmental impact and issues is an increasingly important aspect to look into before getting into business with another company. Compliance with environmental regulations and emission of carbon credits show how environmentally conscious the company is.
Globe Detective Agency looks into these aspects and more while conducting a thorough due diligence exercise for its clients across industries like (please suggest). With experienced professionals, GDA customises its due diligence process as per the individual requirements of clients, ensuring accurate and timely information that leads to informed decision making.
