Three Opportunities for M&A Due Diligence

The most important aspect of investigating and evaluating a potential merger & acquisition is due diligence. Due diligence explores the details behind the company to help you become fully informed about the target’s financials, business model, internal systems, profitability, key operational data, relationships, and other key factors that will assist you in making an informed decision about your investment.

Mergers and acquisitions due diligence is designed to protect your interests by providing objective and reliable information on the targeted acquisition. Three strategic times to perform M&A due diligence include pre-acquisition, post-acquisition and sell-side.

Pre-Acquisition Due Diligence

Pre-Acquisition due diligence should begin with identifying a senior management staff member who will assist with management buy-in for the due diligence process and facilitate communication of key issues across all functional areas potentially affected by a new acquisition such as business process owners, legal counsel, the board and its committees and outside consultants.

Before completion, a pre-acquisition due diligence checklist should have addressed a prospective subsidiary’s control and risk mitigation posture relative to the acquiring company expectations, whether unmitigated key business risks, such as the absence of a repeatable financial institution Allowance for Loan Loss methodology, may adversely influence the acquisition decision, the estimated effort required to implement missing controls as a factor in establishing the acquisition price, the compatibility of legacy and outsourced systems with acquiring company systems and the impact of the potential acquisition’s control posture on post-acquisition due diligence.

Post-Acquisition Due Diligence

Post-acquisition due diligence helps identify unmet initial business plan goals, allowing the acquiring company to take corrective action before incurring substantial losses. Key components of effective post-acquisition due diligence include a transition manager, a business process and control expert, an initial comprehensive business process, a control review and an annual, rated audit.

Throughout the first few months after acquisition, the business process and control experts and transition manager should employ a supportive, consultative approach toward the acquired company with a focus towards implementing the items detailed in an acquisition plan.

Sell-Side Due Diligence

Prior to selling an acquisition that did not work out, sell-side due diligence should be performed. Sell-side due diligence is similar in nature to pre-acquisition due diligence and prevents other companies from rejecting the deal if issues arise.

Sell-side due diligence should result in a report that identifies key aspects of the due diligence performed, a final sales price, issues that could substantially affect the sales process and recommendations to help mitigate those issues.

A strong due diligence process is critical to ensure that the acquirer is fully aware of all aspects of the deal and provides access to vital intelligence that is used to negotiate the final price and integrate the acquired company more effectively.

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