Significance of Due Diligence as a Procedure
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This document discusses due diligence and its importance in mergers and acquisitions. It defines due diligence as an investigation to confirm facts before entering a transaction. Reasonable diligence means considerations vary by situation. Due diligence goals include collecting target company information, conducting SWOT analyses, and identifying risk areas. The process typically involves planning, data collection, analysis and reporting phases. Due diligence is important for acquisitions, IPOs, and other transactions to understand risks and ensure a good strategic fit. Checklists help avoid overlooking issues, but due diligence remains judgment-driven and poses integration and information risks.
Significance of Due Diligence as a Procedure
- 3. Due diligence is an investigation, audit, or review performed to confirm the facts of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party. Reasonable diligence refers to the notion that no two situations or transactions are identical and should be treated accordingly. For example, in M&A no two firms have the same capital, assets, liabilities, practices, or risk. Therefore, items that would be considered reasonable to painstakingly examine for one firm may not be applicable to another.
- 4. To collect material information from target company. To take collective decision about an investment. Conducting the SWOT analysis. Improve bargaining position. To identify the areas where representations and warranties are required. To attain a desired comfort level in a transaction. Complete and accurate disclosure. Bridge the gap between the existing and expected.
- 5. Analysis of who runs the company. A contrastive analysis of both company’s. Research and compare the boundaries of competitors for a better comprehension of the target company. To learn industry-wide and company-specific dangers, and check of on-going risks and unforeseeable threats in the future. To maximize the profit for the future.
- 6. Time driven. Significant involvement of finance team and senior management. Purpose of the process is Risk Management. Largely out of your control. Inadequate due diligence = RISK.
- 7. Viability Monetary Aspect Environment Personnal Existing & Potential Liabilities Technology Effect of Synergy
- 9. Business / Commercial Due Diligence. Legal Due Diligence. Financial Due Diligence. Tax Due Diligence. Mergers & Acquisition. Securities Sales. IPOs. Banking. Enhanced Due Diligence. Simplified Due Diligence. Contingent Due Diligence.
- 10. To meet legal and regulatory requirement by both the parties. Draws more scrutiny while buying a private company. Process has to be customized for different types of M&A structure. Inadequate preparation and transition planning. To keep up with the changing regulations. Sellers may be reticent to provide all information.
- 11. The main reason you need a due diligence checklist is to make sure you don't overlook anything when acquiring a business. Having a due diligence checklist allows you to see what obligations, liabilities, problematic contracts, intellectual property issues, and litigation risks you're assuming. Most of the documents and information on your due diligence checklist is available on request. Once you have the information, it's up to you to analyze it and decide whether it's a good investment. Another reason a due diligence checklist is important is that the buyer needs to know if the company is a good fit for its business. If the selling company provides a service the buyer doesn't, it becomes beneficial. It also provides a way to measure the length and cost of integration, as well as potential revenue. Company sales, mergers, and acquisitions should all follow the same checklist to avoid unforeseen issues. Sellers might also create a reverse diligence checklist to analyze the buyer.
- 12. PREPARE in advance. RESOLVE fixable issues ahead of an exit. BUILD credibility. CREATE a strong management team. ENSURE that any negative impact on trading is minimized.
- 13. Due Diligence should be regarded as an integral element of an M&A transaction. The Due Diligence process must be structured and coordinated in such a way that the information gathered enables the buyer to make an informed decision on whether to go through with the acquisition and whether to manage any post- acquisition issues that have been identified. In addition, the Acquiring Company’s management and Due Diligence team, supported by external advisors if necessary, have to structure and focus their Due Diligence efforts on the buyer’s objectives in order to verify that a purchase transaction can bring the desired.
- 14. Workforce, competencies and work culture remain a mystery to the acquiring company. Due diligence is a process which is judgment driven and this can pose a risk. Availability of Information. Constant fear by the target company that the existing customers may leave. Confidential nature of transactions.