M&A Due Diligence Activities You MUST DO to Reduce Risk
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Mergers & acquisitions are a cost-effective way to grow your business, increase your market share, and diversify your portfolio—All while eliminating competition. But not all M&As are successful.
Have you ever made a significant purchase that had zero reviews online? You reluctantly enter your credit card number and wince as you click “Buy Now.” Why? Because you’re taking a risk. You don’t have the scrutiny of public consumers giving you the information you need to make a confident purchase.
This same risk applies to most private company acquisitions. It is the responsibility of the buyer to gather all the pertinent information they need to make a wise purchase. Unless you’re buying a public company, you don’t have the luxury of public disclosure.
In an M&A, the buying company needs to investigate the target company’s potential risks, obligations, and opportunities before finalizing its investment. You also need to understand the competitive landscape, corporate organization, and condition of the company’s management and employees. It’s critical to do your full due diligence before completing the M&A transaction.
Here are a few critical due diligence activities for you and your team to help your M&A process go smoothly.
Get the Full Scope of the Target Company’s Financial Health
Financials are first on the list for a reason. It’s not just about how much money the company has in the bank; it’s also about their past statements and future projections. Are there any debts owed or cash flow issues? What working capital is needed to continue doing business throughout the acquisition, and what is the margin for growth? The strength of the target company’s balance sheet is fundamental when assessing the value and price you’re willing to pay for the target company.
Understand Your Legal and Tax Obligations
Bringing aboard your legal counsel and accountant is necessary to ensure a swift and efficient M&A. Legal and business due diligence means looking into the target company’s litigation history and pending legal issues. Are there any copyrights, patents, or intellectual property you need to be aware of before acquiring? Does the company adhere to government regulations, tax requirements and comply with changing laws? The last thing you want is to inherit undisclosed liabilities after your acquisition.
Know What Contracts You Are Acquiring
Part of an M&A is taking on the existing contracts of your target company. These include, but are not limited to:
- Loans or leases on equipment
- Employee agreements or union contracts
- Real estate and property rentals and agreements
- Insurance policies
- Contracts with customers or vendors
These contracts will be transferred to you when acquiring the target company. Make sure you understand your contractual obligations before signing on the dotted line.
Due diligence in a merger and acquisition requires time, patience, and follow-through. The amount of back-and-forth between the target company, lawyers, and accountants to disclose all necessary information can feel endless. At RTA Group, we have a team of experienced legal and financial advisors who understand your unique needs when it comes to your M&A. We know what strategies will result in the best value for you and the target company.
Let RTA Group do your due diligence to eliminate the risk of M&A failure. Get the support you need for a successful future. Call us today.
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