Identifying potential targets can be an exciting, yet overwhelming, process for corporate executives and boards of directors. Whether motivated by financial growth, economies of scale, global expansion, or product diversification, a knowledgeable, informed, and wise acquisition requires a committed due diligence effort.
According to a report entitled M&A 2015 Outlook (the Report) released by Raconteur, due diligence is a critical step and primary factor in the overall success of mergers and acquisitions. Due diligence involves an analysis of the information and documentation that an acquirer wishes to see prior to signing a deal. Typically, a buyer will request to review the financial statements and projections, constating documents, contractual agreements, and other company specific details of the seller. Due diligence should be both a backward-looking and forward-looking process whereby the buyer analyzes the historical performance and the future prospects of a target.
In order to capture synergistic gains from a transaction and evaluate strategic benefits, the latest trend is to engage not only financial and legal professionals in the due diligence process, but also extend involvement to operational management including information technology, human resources, manufacturing, marketing, and sales personnel. For the broad array of individuals engaged in the process, due diligence can be seen as the most tedious and drawn out component of the transaction; sometimes lasting over two months.
A 2013 research study conducted by the Cass Business School found a correlation between lengthier due diligence processes and higher long-term shareholder value. This finding explains why due diligence is far more than a legal formality. Rather than discovering a deteriorating customer relationship or a significant pensions hole when it's too late, an upfront awareness of the facts can help facilitate strategic decision-making.
Selling a company can be an emotional process for a founder who has invested time, money, and energy into the growth and development of a company. However, it is important not to let these emotions strain the relationship between the buyer and the seller. The due diligence process is often accompanied by time pressures and demands from either party but this should not be allowed to compromise a solid working relationship. Fostering and maintaining a strong working relationship between the buyer and seller can be an asset post-acquisition as parties are often required to continue working together.
An article, Knowledge is Power, featured in the Report states that "love it or hate it the process is an opportunity for a buyer to look under the bonnet of the target company and verify any assumptions that may have been made earlier". It is only after a thorough analysis of a target company that one is able to truly evaluate the strengths and weaknesses of a potential acquisition and make a smart and duly informed business decision.
The author would like to thank Victoria Riley, articling student, for her assistance in preparing this legal update.
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