Due Diligence requires extensive company and industry analysis, in-depth financial statement analyses, determining possible strategic synergies realizable between companies, and performing an array of valuation analyses. I can imagine that some of those Due Diligence tasks may be outside of your time constraint, especially considering that a thorough analysis is extremely important when considering an acquisition or exit opportunity. As a Buyer or a Seller, Due Diligence can be a daunting task, which can be made easier by using the support of a team of expert analysts with years of experience.
As a Seller you want to make certain that your data is organized and accurately represented to avoid scaring away a buyer or lowering your potential exit value. Lack of order and clear presentation of data can also lead to claw backs after an acquisition – claw backs are exceedingly painful.
As a Buyer you want to be certain that you’re getting value and are aware of the risks/synergies. Buying a business is risky, and risk should be outlined in a disclosure schedule with the ability to withhold escrow for misrepresentations. Potential synergies should be identified with a clear action plan to unlock synergies post acquisition.
Company and Industry Analysis:
Understand trajectory of company and industry
Determine drivers behind the industry’s recent performance
Determine rationale behind selling/buying the company
Financial Statement Analysis:
Understand the financial metrics that drive company success
Determine where margins outperform/underperform competitors
Find opportunities to increase margins, reduce unnecessary or one-time expenses
Valuation Analyses Performed Through the Due Diligence Process:
Market Approach – in a free market, buyers will not pay more and sellers will not accept less than the price of a comparable business enterprise. By determining Public Comparable Companies and looking into M&A Precedent Transactions, the resulting price will be a reliable indicator of value
Income Approach – used to estimate the present value of the estimated future monetary benefits to the company by using the Discounted Cash Flow method
Merger Model – analysis of the combination of two companies, key assumptions including purchase price, cost and revenue synergies, financial statement adjustments, forecast financial projects for target and acquirer
Determining Cost or Revenue Synergies can make or break an acquisition from either side of the table
If Synergies are properly discovered and a detailed plan is given to realize synergies it can convince Board of Directors or Management
Cost Synergies can be realized through expected savings in operating costs after two companies join
Revenue Synergies can be realized through cross-selling products to customers, up-selling customers on new products, and by expanding into new territory
As described above (analyses described above are not all inclusive), due diligence is extensive and can be a difficult process if you lack the time and resources to execute properly. It’s our goal to make the process of buying or selling a business as easy as possible for you!