A look at the thesaurus for synonyms of the word “diligence” words such as alertness, earnestness, vigor, and intensity show up. The words expected and owed are synonyms listed for “due.” Put together, “due diligence” clearly means that alertness is required, and earnestness is expected and owed from one party to another.
During a merger, one party may want to know if the revenues and margins of the enterprise are growing or deteriorating? An investor will want to confirm what registered trademarks and service marks does the seller have? A business partner may want to confirm information regarding the top 20 customers and the revenue generated from each of them.
Due diligence is an integral part of the acquisition process and entails a systematic investigation of all matters related to business dealings. Companies have different structures. Therefore, it is imperative to ensure that all pieces of information related to the sale or purchase of a business and its assets are covered. In the process of mergers and acquisitions, due diligence ensures that clients reveal information related to any financial, legal, or operational risks that may not be perceivable from outside perspectives.
From an external point of view, it may appear that due diligence will benefit one party, but the reality is that it favors both the seller and the buyer during mergers and acquisitions.
A company’s existing customer base, stakeholders, and partner relations are all essential pieces of information. This may validate positive premises made or give an indication of possible threats. From a buyer’s perspective, it is important to enabling the right decision. The buyer will, then, be rest assured that the decision has been made, taking the correct details into account, post the conduct of due diligence.
How to check the financial integrity of the buyer with respect to the business being bought? How to ensure that the fair market value of the business is being considered for sale?
There are five broad categories into which due diligence can be conducted for:
1. Environmental: Any transaction that includes land or property may get environmental due diligence conducted. This will entail an analysis of recent and past events at and around the property to determine possible or current environmental pollution obligations. Environmental diligence may be of particular interest to land developers, lenders, attorneys, or private owners who intend to purchase, refinance, or occupy a property.
2. Legal Review: Are there any litigations filed or pending against the company? Have all legal matters been settled, and if all the terms of the settlement have been met? Are there any claims that threaten the existence of the business? Such issues may require a complete legal review to ensure that all aspects of the company are sacrosanct.
3. Financial Review: This aspect requires inquiry for sure. Financial statements and metrics are covered with a fine-tooth comb to rule out any irregularity. Target projections, future performance, and such are minutely studied. Documentation and accounting books must be up to date and accurately present numbers.
4. Sustainable business: Detailed analysis of the company’s previous years’ data helps make future projections. Trends and future possibilities can be derived from basic aspects such as cash flow management, profit and loss statements, etc. The company’s long-term sustainability is a must for due diligence of mergers and acquisitions.
5. IT review: In order to make informed financial planning, and to understand the true value of the target business, a review of its IT capabilities is a must. The company’s security risks need to be considered for due diligence.
Due diligence requires true and honest disclosures. As someone said, “Diligence is the mother of good fortune.” Due diligence is sheer brilliance!
At Kg Fin Advisors, we offer due diligence services to businesses in all industries. We evaluate and authenticate their commercial, economic, organisational, and strategic concepts by providing estimates while demonstrating precision and accuracy, based on our years of experience. You may set up a FREE consultation by emailing at john@kgfinadvisors.com