The bottom line ….. Let’s make sure your planned acquisition will be a profitable deal for you and avoid any ugly surprises. I highlight how to do this in my latest blog post and I hope it helps you!
What is acquisition due diligence?
Acquisition due diligence is the process by which you gather information about a business you are planning to acquire so that you enter into the purchase with full knowledge of all the relevant facts.
To ensure that the investigation is thorough, most prospective purchasers rely on trusted advisors who are experienced in acquisitions to guide them through the process. This allows the purchaser to feel much more comfortable with their decision.
The key phases of acquisition due diligence
The first step in due diligence is to evaluate the deal, to assess the key risks, and opportunities. Based on these findings, you then need to carry out a detailed investigation in four critical areas:
- Financial
- Legal (including environmental concerns)
- Marketing/commercial
- Cultural
Financial and legal due diligence involves the examination of these key areas:
- Assets,
- Liabilities
- Cash flow
- Revenue
- Growth rate.
Marketing/commercial due diligence involves taking a hard look at your assumptions regarding the company’s future revenue growth and profitability, as well as assessing the market’s key leverage points and how those might be changing.
Cultural due diligence means researching how the organization is run; how management reviews, evaluates and rewards employees, and how management sets performance expectations.
To conclude the due diligence process it is recommended to create financial projections using different scenarios. The key scenarios are as follows:
- List all your assumptions in detail.
- Examine the potential synergies.
- Do two-to-three-year cash flows.
- Decide whether the projections indicate a workable deal.
Due diligence checklist
The checklist of items you need to cover during due diligence is very long and detailed, but you must ensure that your due diligence team pays close attention to all of them. The items on the list fall under ten main headings, as detailed in our blog “10 Steps Of An Acquisition Strategy”.
Tips for effective due diligence
To enhance your overall due diligence efforts, you need to create a cross-functional due diligence team. Every team member should put the following questions to people at all levels in the company you are proposing to acquire:
- What are the three biggest problems in this business?
- What are the three biggest opportunities in this business?
Take care to avoid the two biggest due diligence mistakes:
- Having too much confidence in the company’s future revenue growth and profitability.
- Misunderstanding the business you intend to acquire.
Next steps to minimizing your acquisition risk
Contact us to learn more about how thorough acquisition due diligence can give you the necessary reassurance or prevent a disastrous deal.
Thank you for reading and I hope you enjoyed this blog post and it gave you some insight into acquisition due diligence. If there are other topics you would like me to discuss please leave me a comment.
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