Due diligence
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Due diligence – it is a process of controlling a company's commercial, financial, legal and fiscal health in a multi-faceted way. Its purpose is to make a detailed assessment of the current situation of the company and to identify the current and potential risks in relation to the planned capital transaction (e. g. merger or acquisition) of the other entity. It is the last stage of the pre-transaction phase, which follows the negotiation phase.
Concept of due diligence
A procedure plays an important role in the M&A process because it aims at objectively and neutrally assessing a company. In the Anglo-Saxon system, its priority is to analyze the financial condition and cash flow of the company [1].
Financial due diligence, despite its complexity, actually boils down to the examination of tangible assets of the company. Intangible assets such as, but not limited to, logos and brand values are usually omitted. However, such an approach does not allow for a complete assessment of the condition of a given company, which very often makes them inadequate and not entirely precise. Despite this, financial due diligence aims to provide potential investors with relevant information about the company. In addition, it allows you to verify the business plan presented to them and the guaranteed benefits of the planned transaction [2]. The financial risk, which is examined during the due diligence process, is directly related to the commercial risk. According to the presented theories, the lower the commercial risk, the higher the financial risk [3].
Due diligence in M&A
Due diligence is one of the most important stages of M&A, during which the acquiring company is able to better manage the risks associated with achieving the acquisition objectives. It is best to start it (due diligence) by researching publicly available registers. The next step is to go through the next stages of due diligence [4]:
- Preliminary due diligence;
- Due diligence review;
- Transactional due diligence
During preliminary due diligence, all publicly available information about a company is reviewed. In addition, they are aggregated and then compared with other companies that may be competitive to the target company [5]. During a due diligence review, the parties start the negotiation process and sign the NDA. The aim of this phase is to obtain valuable private information about the acquired company and then to negotiate appropriate terms of the acquisition. However, the most important is transactional due diligence. It is during this process that the acquiring company can obtain the most valuable and accurate information about the company. This allows, among other things, to determine the market price of the company and the value of its net assets. This is the last moment when it is possible to withdraw from closing a trade. However, if it is carried out in such a way as to enable negotiations to be closed, ownership of the company under scrutiny is ultimately acquired by the acquiring company.
Footnotes
References
- Flyvbjerg B. (2013) Quality control and due diligence in project management: Getting decisions right by taking the outside view, "International Journal of Project Management", nr 5
- Gleich R., Kierans G., Hasselbach T. (2012) Value in Due Diligence, Contemporary Strategies for Merger and Acquistion Success, Gower Publishing Limited, Farnham
- Howson P. (2017) Due Diligence - The Critical Stage In mergers and Acquisitions, Routledge, New York
- Howson P. (2016) Commercial Due Diligence – The Key to Understanding Value in an acquisition, Gower Publishing, New York
- Slađana S. (2013), Due diligence as a key success factor of mergers and acquisitions, "Actual Problems of Economics", nr 6 (144)
- Yung C. (2009), Entrepreneurial Financing and Costly Due Diligence, "The Financial Review", nr 1
Author: Dominika Pałkowska
