A report is generated at the end of the due diligence process, which details all the audit or investigation findings. Read this post to know four reasons why this report is critical in every Merger and Acquisition (M&A) deal.
Due diligence is the process of auditing or investigating a target company before getting involved in business transactions or deals. All the findings of the audit are then used for creating the final diligence report. This report is shared with all the executive members responsible for evaluating and closing the deal.
The report’s scope and size vary as per the intent of due diligence and the subject being examined. While due diligence is performed in different types of business transactions, including company sale, IPOs, private investment, etc., it is most commonly used during M&As.
1. Verify the Financial Health of the Company
Financial analysis is one of the most critical aspects of the due diligence process. Financial statements and tax-filing documents of the target company are thoroughly verified to analyse its financial health. Even the company’s financial forecasts and models are evaluated to understand its financial stability and scope better.
The diligence report includes a detailed summary of this analysis so that the buyer is better able to gauge the finances of the target company and take appropriate decisions.
2. Operational and IT Diligence
The company’s operations and the IT infrastructure used are analyzed to ensure that they are up to the business standards and function effectively. With modern technologies now playing a critical role in the functioning and growth of businesses globally, this is one aspect that deserves the attention of executives and decision-makers before getting involved in an M&A transaction.
The due diligence process will thoroughly analyze the operations and IT infrastructure of the target company and provide a detailed overview, in the diligence report.
3. Environmental Impact of the Company
As the world is now working towards being more environment-friendly, there are stringent regulations in almost every country to ensure that businesses reduce their carbon impact on the environment. Apart from the legality and regulations, being environment-friendly now has a significant effect on a company’s reputation.
The due diligence process will ensure whether the target company complies with all the local and international regulations regarding the environment.
4. Determine the Strategic Fit
It is often the case that a particular company appears to be an excellent M&A contender initially. But after the initial analysis and research, it turns out to be not a great fit for the buyer organisation. The due diligence process lays a major emphasis on whether or not the target company is the right fit for the buyer.
The overall functioning, finances, objectives, products/services, compliance, administration, etc., are taken into consideration to determine the strategic fit of the target company. The due diligence report generally includes detailed information about the same.
Informed M&A Decisions with Due Diligence Report
By not having a diligence report, a company would be blindly diving into a business deal without fully understanding how the transaction could impact their finances, legality, reputation, and operations.
For enhanced protection against such severe outcomes, businesses generally rely on independent due diligence advisors for conducting the audit or investigation before initiating an M&A transaction. The outcome of the due diligence process makes it easier for the buyers to make the right buying or investing decision.