Due Diligence: The Critical Stage in Mergers and Acquisitions

Knowing how to identify promising merger and acquisition targets can help minimize some of the risks that mergers might pose to companies.

To avoid capital losses and uncover hidden motives, it is imperative for businesses considering a merger and acquisition (M&A) deal; to perform a thorough due diligence and investigation process. Reviewing the seller’s information will reveal important information about the company’s financial position. This will allow you to detect any possible problems. After signing a letter of intent to purchase a company, it is advisable to consult with a CPA offering accounting, tax, and M&A services to begin the due diligence investigation process.

If you are considering buying a company or planning a merger, learn what is due diligence in acquisitions and the importance of investigating a business.

acquisitions-vs-mergers-understanding

There are various reasons why corporations and companies enter into restructuring transactions, such as acquisitions and mergers of companies. Some businesses use M&As for scaling their business, obtaining resources, increasing existence in markets, enhancing operational efficiency, and diversifying services and products. In most cases, a CPA experienced in equity and fixed income is essential to helping buyers understand the merger motives and gain insight into the financial and operational risks.

Below is an acquisition vs merger explanation to know the differences between the two transactions in selling and consolidating companies.

An acquisition is the purchase of a company or a percentage of ownership by another business. A merger includes three categories: statutory, subsidiary, and consolidation. Merging into another company is a statutory merger, while a subsidiary is a buyer acquiring a business, becoming a subsidiary. Merging multiple entities in a consolidation merger integrates two or more companies to form a new entity. Thorough due diligence when embarking on any of the above is crucial when considering mergers and acquisitions. 

What is Due Diligence? 

Performing due diligence in acquisitions can be thought of as an investigation process; whereby a CPA gathers, reviews, researches, and analyzes information and data to establish the ins and outs of the business you wish to acquire. The due diligence process involves securing accounting and tax-related information, which helps provide a clearer picture of the financial reputation of the business. This may prevent monetary loss, and aid a potential buyer to uncover hidden motives. For example, the seller may not disclose information regarding liens or unpaid taxes owed to the Internal Revenue Service to the buyer. Omitting disclosure of such information could cost you thousands to hundreds of thousands of dollars, placing you in a financial situation that can be avoided by doing your due diligence. When considering a partnership, merger, or acquisition, conducting thorough due diligence to understand the other business, is imperative to protect you and your assets. 

Things to Consider When Performing Due Diligence

To detect possible risks, the following should be investigated during the due diligence process:

  • Financial Statements
  • HR (Human Resource)
  • Intellectual and Technology Properties
  • Information Technology (IT), Cybersecurity, and Data Breaches
  • Policies & Contracts Employment Law
  • Insurance
  • Legal (Governmental Regulations, Report Filings, and Law Compliance)

Partnering with seasoned financial analysts can help ensure closing the M&A transaction is a success that will financially benefit you. All due diligence steps in mergers and acquisitions must be verified using an M&A checklist to verify the financial motive of the business. This checklist will help you gain clarity on pursuing the acquisition or merger agreement or refusing the offer during negotiations.

acquisition-merger-information-due-diligence

1. Financial due diligence
2. HR due diligence (employee and management benefits, wages, salaries)
3. Legal due diligence
4. Contracts due diligence
5. IT due diligence
6. Employment law due diligence
7. Insurance due diligence
8. Legal due diligence technology due diligence
9. Intellectual & technology property due diligence
10. Customer base and sales due diligence
11. Policies of due diligence
12. Licenses due diligence
13. Tax due diligence
14. Insurance due diligence
15. Governmental regulation due diligence
16. Marketing plan and strategies due diligence
17. Permits due diligence
18. Litigation due diligence
19. Cybersecurity due diligence
20. Competition due diligence

 

If you have decided to embark on an M&A process for your business, Fusion CPA can assist. Our services include everything from aiding with deal structures, doing thorough due diligence, and more.

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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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