Due diligence is the core of any successful M&A deal in the UK and worldwide. This is the investigative phase, where the buyer verifies the accuracy of the representations made by the seller.
Statistics vary, but it’s estimated that 80% of M&A deals fail due to issues uncovered during the due diligence phase. As the most complex and time-consuming part of M&A transactions, anticipating issues and solutions increases the odds that your deal will succeed.
Here’s what you need to know about the most common due diligence issues.
What is a due diligence issue in an M&A?
Due diligence issues can cause the collapse of a deal. Without adequate due diligence, you risk entering a situation whereby issues are only uncovered after the conclusion of the deal. In this case, you would have no recourse, with the principle of caveat emptor, or let the buyer beware coming into play.
Firstly, what are the goals of M&A due diligence?
· To verify the accuracy of the information provided.
· To identify potential problems and avoid a bad deal.
· To obtain information to reach a fair deal price.
· To ensure that the deal complies with your defined criteria.
Expect due diligence to take anywhere from 30 to 60 days, although high-value deals may take considerably longer.
Due diligence issues are usually split into three areas: financial, legal, or operational. Any issue in these categories could turn a promising deal into a transaction to walk away from.
However, how you react to due diligence issues largely depends on the extent of the problem. Not all due diligence issues necessarily result in walking away from the negotiating table.
What issues are you looking out for when conducting due diligence in an M&A?
Perhaps the greatest challenge for businesses is being unsure where to begin. Due diligence requires experts drawn from an array of professions, which is why the process is so resource and capital-intensive.
Here’s a breakdown of the main areas you should be focusing on:
Financial – The primary issue you should focus on is the financial side. During this part of the process, you’ll focus on historical and current financial performance for accurate forecasting.
Legal – Investigating any potential liabilities or pending lawsuits against the company. Remember, if you overlook any legal issues, you, not the previous owners, will be responsible for resolving them.
Tax/Fiscal – A review of all the taxes a company must pay. Due diligence will also evaluate current tax liabilities and whether the company is compliant.
Operational – An in-depth view of the main operations of the company. You will account for every facility and each process. This is also an opportunity to figure out how to create additional value by making future operational improvements.
Intellectual Property – IP is one of the main assets you can acquire when buying a company. Due diligence must examine the quantity and quality of the target firm’s IP, including patents, trademarks, brands and copyrights.
Commercial – Otherwise known as market due diligence, one of the issues you must resolve is validating the strategic opportunity on the table. This includes reviewing the company’s market and customers.
Information Technology – IT is critical to how any company runs. So, it makes sense that you should spend time on a company’s IT infrastructure, processes and cybersecurity protocols.
HR – The next step is HR. This concentrates on employees, management and documents pertaining to both. Doing so will provide an insight into a company’s culture, which will be critical for post-deal integration.
Regulatory – Ensuring compliance in a changing regulatory landscape is critical for avoiding financial penalties, disruption, and reputational damage. This type of due diligence is pivotal in highly regulated industries like financial services and healthcare.
Environmental – In many companies, environmental issues can also present problems in extracting maximum value from your acquisition.
These various categories cover all the due diligence aspects you must cover as part of your investigations. Any problems uncovered in these categories could damage the potential value of your deal and result in significant headaches later.
Note that these are only some of the issues that apply to all companies. Certain industries may require more specialised due diligence conducted by industry professionals.
As always, consult with your team to determine where you must focus your efforts.
What are the most common due diligence challenges in mergers and acquisitions?
M&A transactions naturally result in significant challenges. Poor due diligence can result in your deal failing to reach its financial and strategic potential.
Perhaps the biggest problem associated with due diligence is inadequate preparation. It begins with creating a team of professionals to carry out the process and communicate. Both members of your team and third-party legal and financial professionals carry out due diligence.
Simultaneously, these teams must be able to communicate throughout the process to guarantee that everyone is on the same page.
Another challenge you may encounter is not knowing which questions to ask in the first place. Obviously, asking the right questions means confirming that the deal makes sense for your business. This is why it’s wise to hire M&A consultants to guide you in determining which questions to ask.
Likewise, another problem could be that after you have examined a company, you still cannot answer your questions because of incomplete information. At first glance, this scenario may imply that the seller is being opaque, but this isn’t always true.
Often, incomplete information may arise due to inadequate record keeping or an inability to find the information requested by your team.
Other challenges you may come up against include:
· Slowness in executing due diligence.
· Unplanned costs.
· Inadequate technology to conduct a streamlined due diligence process.
· Achieving buy-in from your team.
· Making an accurate buy-in based on the information you have.
Thankfully, each challenge can be overcome by assembling a team with the right know-how and experience. It underpins the importance of recruiting specialised help from M&A consultants from day one.At Hilton Smythe, we have supported thousands of businesses in planning and executing M&A due diligence. To learn more about how our M&A team plugs into yours, contact us today.