As mentioned in the previous blog (https://www.feasibilityplus.com/post/due-diligence-what-it-is-along-with-its-kinds), due diligence is a process where investors review and evaluate a potential investment opportunity to confirm facts. The due diligence process essentially evaluates the risks associated with potential offers organisations could invest in, selects the least risky investment opportunity and then develops a risk mitigation plan with the company’s management as a part of the potential investment.
All in all, one could call it a process that allows buyers to fully understand target companies in mergers
and acquisitions.
While drafting a due diligence report, three W’s need to be addressed- Who, What and Which.
Who is the target audience that the buyer and target company has in mind?
What is the objective?
And, which aspects would end up being the key factors influencing the decision making process.
Apart from the three W’s, due diligence reports should focus on the following areas:
a. Monetary Aspect.
Ratio analysis helps understand the complete picture when with the key financial data.
b. Personnel.
The capacity, capability and credibility of the people working at the organisation/company play an important role while practising due diligence.
c. Technological aspect.
The assessment of the available technology along with the scope of adopting or implementing new technology plays a major role in planning for future actions.
d. Viability.
Using past records of the target company’s business and financial plans could help the buyer have a better idea of their viability.
e. Environment.
Abiding by the macro-environmental laws and their impact on the organisation is essential to cover in the report.
f. Potential & Existing Liabilities.
Pending regulatory issues and litigations by/for the target company/organisation of any kind must be taken into account.
g. Effect of synergy.
The effect of the synergy between the target company/organisation and the buyer is extremely vital to be considered.
The steps, procedure and policy that comes under due diligence are:
1. Evaluating The Goals And Objectives of The Target Organisation/Company/Idea/Project.
The buyer needs to evaluate whether or not the goals of the target organisation are aligned with the pre-set goals of the organisation/company of the buyer.
It also includes exploring introspective questions (for the buyer) that revolve around what they are hoping to gain from the investigation and whether or not it is going to be helpful.
2. Analysing the Business Financials.
It ensures the accuracy and validity of the documents depicted in the Confidentiality Information Memorandum (CIM) by ensuring they were not tampered with. It is a step that is like the financial records’ exhaustive audit.
It also helps analyse and assess the financial performance, the financial stability, overall assets and red flags relating to the target company/ organisation by inspecting their documents that include-
Short-term debts
Long-term debts
Stock history and options
Various tax-related documents
Various tax-related forms
Inventory schedules
Income statements as well as balance sheets
Revenue trends
Growth trends
Profit trends
Future forecasts and projections
3. Thorough Inspection of documents.
Responsiveness of the seller and their level of the organization while interacting with the buyer plays a major role because if the two-way communication is not efficient or is an arduous experience for the buyer, then it might take a toll on their inclination towards wanting to invest in that target company/ individual/ organisation/ idea/ project.
The buyer first asks the target organisation for their respective documents to audit, then conducts surveys or interviews with the seller and then can even go on-site visits. Following all this, the buyer examines all the information that is collected to ensure the authenticity, accuracy and credibility of those documents- this is to ensure proper business practices along with proper environmental and legal compliances.
All in all, one could say that this helps the buyer gain a better and clearer understanding of the targeted firm/ corporation/ organisation/ company as a whole and answers their introspective questions better.
4. Business Plan & Model Analysis.
To assess the viability and compatibility of the target firm’s business model integrating with their own, the buyer looks particularly at the target company’s business plans and models and analyses them.
5. Final Offering Formation
After the gathering, examining, assessing and analysing of the documents, the teams and individuals come together to express and evaluate their feelings regarding what they found out about the other organisation/ company. This makes up the final dollar the buyer is willing to offer during negotiation.
6. Risk Management
The purpose of this is to minimalize or avoid the impact of financial risks (or which may be associated with the transaction) by forecasting and evaluating them.
We can conduct the due diligence process furthermore the correct way by considering the following tips:
One must start early. This process of due diligence can be a time-consuming one which is why it is considered best to get started early and that too in an organized manner.
Using Diligence Management Software. This helps users not just easily and effectively manage or share files but also helps the data to be securely stored. The whole concept or idea behind diligence management software is that it combines the abilities and features of project management capabilities with a traditional virtual data room.
Complete and effective use of checklists. Users can easily create checklists while using database management software and check items/stages off the list as they are completed.
One must address potential bottlenecks and risks throughout the process if and when they arise during diligence.
Having employ experts. Hiring professionals who are well versed with the due diligent process makes things more easy and efficient while carrying out the process. Experienced teams would know the steps needed to be taken due to having experience with conducting and evaluating diligence.
We now know pretty much everything about due diligence- from what it is, to its types and finally to the fields and processes involved along with a few tips on how to carry it out in an easier way.
Due diligence is not an easy or a quick process which is why it is essential for the team to ensure its effectiveness and organized delivery. One cannot undermine the significance of the information that is discovered during the due diligence process nor can one deny its contribution to close deals faster and successfully!
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