Due diligence is a vital element of any M&A transaction. It helps ensure both sides are aware of the possible benefits and risks associated with the deal. It will also ensure that all information provided by a company is accurate. This is essential to avoid any surprises later. However, due diligence can be a tricky process, especially when it pertains to M&A deals involving private companies. Private companies aren’t required to disclose the same amount of information as publicly traded companies, making it difficult for buyers to fully comprehend the business of the company.
Due diligence can be classified into three main categories: commercial, operational and environmental. Operational due-diligence focuses on reviewing the condition of assets, technology and facilities to uncover hidden costs or liabilities. This type of due-diligence often involves on site inspections. Environmental due diligence focuses on the compliance with environmental laws. It also determines environmental, health and security issues that could have an impact on the worth of a company. Commercial due diligence focuses on the relationship between the acquiring company and its customers. It determines the demographics of customers as well as acquisition strategies and sales performance to determine if the company in question is able to grow and sustain its revenue.
Due diligence is a long and complicated process. Due diligence requires a great amount of time and effort which can be challenging when multiple parties are involved. This can lead to confusion, frustration, and even delays in the M&A transaction. To avoid this, it’s essential to establish objectives early in the due diligence process and stick to them. Prioritizing the most important information is also crucial. For instance, information on IP might be vital, while resumes of non-key personnel aren’t as important.