The process of due diligence involves the assessment of financial, commercial, operational, legal, HR and IT records, among other relevant aspects of the organization, and a comparison of its assorted metrics with its rivals. The objective of preparing a due diligence report is to evaluate risks that are assumed when a business or investment decision is made.
In a typical M&A deal, risk analysts assess the benefits, drawbacks, costs, structures, liabilities, assets, and other pertinent information to enable buyers to confirm crucial information about the seller.
Additionally, it throws light on vital considerations such as whether or not the target would fit in strategically with the buyer’s business objectives, and on several other pertinent points such as the motives behind the decision to sell the company. These strategic considerations are fleshed out before signing the letter of intent.
The process is begun after the letter of intent (LOI) or term sheet is signed.
What are M&A Deals?
M&A deals involve the transfer of ownership of an organization or its merger with another organization. The merger of two companies would require the approval of the boards of directors of the merging firms. Moreover, the board of directors also needs approval from the shareholders of their respective firms. Mergers, as well as acquisitions, lead to the merger of assets and liabilities under one entity.
Though acquisitions mostly involve purchasing companies that are comparatively smaller, firms also acquire larger firms in what is called a reverse takeover.
The structure of M&A transactions depends upon the intent and the interests of the firms executing the deal. Purchasing the shares of another firm entails the transfer of the ownership; however, the buying company cannot wish away the risks and all the liabilities that come with the business it acquires. In yet another form of the transaction, the buying company purchases the assets, often selectively, foregoing the requirement to buy assets and liabilities it may not like.
Why Do You Need a Due Diligence Report for M&A Deals?
A thorough due diligence report for an M&A deal would reveal how a business is likely to perform in the future. It encompasses testing the assumptions inherent in the deal, uncovering hidden costs and flagging potential risks involved in the transaction. The report helps get a lowdown on how the business and its managers operate besides offering insights into the market value of the target company. It also helps evaluate the financial sustainability of the target company.
Due diligence starts after the LOI is signed. The process should ideally be over in 30 to 60 days -- the time period could be extended if both parties agree to it. If the buyer is dissatisfied for any reason at any point during the due diligence process, they have the option to walk away from the deal.
The following aspects decide the duration of due diligence
- Information accessibility: The time consumed in due diligence may be shortened if the seller promptly responds to the buyer's demand for documents.
- Turnaround time: This is based on how quickly the buyer reviews the information.
- Communication: The due diligence period can be shorter if the seller is more accessible.
Checklist for a Due Diligence Report
Using a checklist for the due diligence report ensures that all necessary information is gathered.
- Corporate Structure
- Strategic fit
- Financial
- Commercial
- Legal
- Human Resources
- Information Technology
- Environment, Health & Safety
- Patents and Copyrights
- Regulatory and Compliance Information
- Taxes
Resurgent India’s Due Diligence Services
We offer due diligence services to businesses across a truly wide range of industries. Our deep domain experience and pan-India presence help us keep an ear to the ground to accurately assess and substantiate facts, assumptions and strategies.
Our due diligence report includes a comprehensive examination and critical evaluation of all vital aspects of a business, such as its financial, operational, and legal performance, and uncovers risks and vulnerabilities that might not be obvious to an outsider.
