In this series of articles and publications, I covered some of the important aspects of M&A. Now, I will go into more detail about due diligence and its importance.
In this phase, the buyer needs to confirm, more precisely, the information initially received. To do so, a thorough and detailed assessment of the company to be acquired or merged is required.
The objective is to provide important information about the financial health, legal standing, and potential risks of the company.
Why is this phase considered so important?
Conducting a complete due diligence is essential to ensure that the merger or acquisition decision is well supported and that all risks involved are taken into account. It also serves to identify possible issues that need to be resolved before the transaction is finalized.
What is expected to be found in the information and data collected?
Due diligence can reveal hidden problems within the company, such as compliance issues, pending litigation, or fragile financial situations. This allows the buyer to take steps to minimize those risks before closing the transaction.
Some points reviewed:
Financial condition of the company: including recent financial information such as balance sheets, income statements, and financial projections.
Operations: including the company's structure, internal processes, suppliers, and customers.
Intellectual property: trademark registrations, patents, copyrights, etc.
Legal and regulatory compliance: verification of tax obligations, compliance with laws and regulations, etc.
Environmental matters: verification of environmental liabilities and compliance with environmental regulations, when applicable.
Labor matters: verification of pending labor disputes or claims.
This process provides valuable information that helps ensure the security of the transaction and maximize the return on investment for the buyer. For that reason, it is important that it be carried out by experienced professionals and that the negotiation team be aware of each item so decisions can be made based on the information obtained.
If something relevant is found during due diligence, such as serious financial issues, legal problems, significant environmental concerns, among others, it is important to assess the situation and decide whether it is still viable to proceed with the negotiation.
Some options in that case would be:
Negotiate with the target company to reach an agreement on how to resolve those issues;
Adjust the transaction price to reflect the risks and problems identified;
Walk away from the transaction, if the problems are considered serious enough to make the deal unviable (deal breaker).
The final decision will depend on how much those problems affect the value and viability of the transaction, as well as the capacity and availability of resources to resolve them.
It is important to have a good advisor, along with legal and financial counsel, before making any decision.
