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The Basic Principles of M&A Due Diligence – Bill Kost, ARM-E

The Basic Principles of M&A Due Diligence – Bill Kost, ARM-E
Hendershot Cowart , P.C.

One of the worst mistakes a business can make in Mergers and Acquisitions is to conduct inadequate due diligence prior to transaction close. There can be many hidden problems—liabilities, unaccounted costs, legal exposures, or worse—that need to be known prior to transaction close, yet some companies fail to perform this critical step and are categorically worse off. Key business areas requiring due diligence prior to any M&A activity include the following:

  • Tax
  • Legal
  • Accounting
  • Insurance
  • Environmental
  • Title
  • Employee Benefits

Most people who have studied Latin or ever bought a used car should be familiar with the term caveat emptor, or “buyer beware.” This guiding principle of understanding the business implications of a potential transaction drives due diligence in support of Mergers and Acquisitions. Due diligence is the process of investigating and evaluating a potential M&A target from multiple perspectives to gain a holistic, enterprise-wide understanding of the target in its current state. Equally important, proper due diligence is necessary to forecast the impact to your business from a tax, legal, accounting, risk management, and a myriad of other perspectives.

Due Diligence – What is it, why do we do it, and how?

We need to first answer these three very important questions about due diligence. It is equally important to be able to understand the answers to each of these questions since those answers provide the correct context for performing due diligence. Furthermore, it is essential for clients to understand the implications of these answers to not only manage their expectations, but also enable vendors to most effectively perform due diligence.

Due diligence is the process by which various subject matter experts (SMEs) evaluate the target business and provide a report that communicates the implications of the contemplated transaction. Each due diligence project will have a different scope of work applicable to the subject matter; however, the analysis and report are at the core of due diligence.

For example, insurance and risk management consultants perform due diligence to evaluate the risks and liabilities associated with a given transaction, many of which are insurable. These experts help determine the true costs of a transaction and identify opportunities to enhance the investment through insurance, contractual risk transfer, or other risk management techniques to better align with their client’s risk appetite.

The essential work-flow process for due diligence includes the following:

  • Engagement
  • Analysis
  • The Report
  • Signing/Closing

At Hendershot Cowart, P.C., we help our clients successfully merge, acquire, establish joint ventures, and complete other high-stakes transactions. Our clients transact businesses ranging from hospitals, surgery centers, and medical and dental practices to software companies, oil and gas ventures, manufacturers, distributors, and wineries.

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