Prior to subscribing to equity in any private company or acquiring another company, potential buyers should conduct a thorough examination of different aspects of the company. Due diligence is the most important and lengthy process in any deal. In this blogpost we will explore different aspects that a buyer should keep in mind while conducting due diligence.
What is due diligence?
Due diligence is the critical examination of key aspects of a business (also called “target”) that a potential investor or buyer is looking to invest in or acquire, prior to agreeing to a purchase price and/or signing definitive agreements. During a due diligence process, research is conducted to ensure that all facts about the target are unveiled before the buyer enters into an agreement. Every aspect of the target’s business should be subject to due diligence – financial, commercial, operational, tax, human resource, environmental, legal, IT, etc.
Why due diligence matters?
Deals and transactions that undergo a rigorous due diligence process is more likely to succeed for both the buyer and seller.
While due diligence may seem like it only benefits the buyer, it can be equally beneficial to the seller in a transaction. From the buyer’s perspective, due diligence allows him/her to be more comfortable that his/her expectation regarding the deal is correct. From the seller’s perspective, conducting a due diligence can often help him/her undercover the true value of a company (more often than not, higher than he/she expected it to be).
What are some of the things you should look into during the due diligence process?
Due diligence in a transaction should cover the broad aspects below:
Strategic: Here, the potential investor or buyer examines the market in which the target company operates in. For instance, who are the target’s current customers and suppliers, understand its competitors and analyze the underlying assumptions of the target’s business plan.
Commercial: This is done to evaluate the target’s commercial attractiveness. Here the target’s value proposition is analyzed in-depth to ascertain whether the target will be able to achieve its forecasted plans.
Operational: Here, the target’s business model and all business processes are studied. For instance, supply chain and logistics efficiencies, human resource and workforce productivity and retention, cost optimization, risk management, etc.
Financial: In this, the target’s historical financial statements are studied and assumptions behind forecasted financials are investigated to ascertain the soundness.
Legal: During legal due diligence, the potential investor or buyer investigates if the company has any outstanding liabilities or obligations that may prove detrimental in the future, should the investor choose to invest. Other legal matters such as share class structure, terms and conditions in deal related documents, etc. are studied in detail.
How can Falak help?
At Falak, we are involved A to Z in the deal-making process. In sell-side mandates, we review a Company inside-out before running the mandate. Similarly, we also help buyers who are looking at acquiring a target conduct a thorough third-party independent verification and examination of the target’s operations. We are involved in the whole spectrum of the due diligence process from commercial to operational, financial and strategic. We follow a strict comprehensive due diligence checklist built in-house to uncover all aspects of the business.