Due Diligence

As with any project, the first step delineating corporate goals. This helps pinpoint resources required, what you need to glean, and ultimately assure alignment with the firm’s overarching strategy. This involves introspective questions revolving around what you need to gain from this investigation..

This step is an exhaustive audit of financial records. It ensures that documents depicted in the Confidentiality Information Memorandum (CIM) were not fluffed. Additionally, it helps gauge the company’s asset health, asses overall financial performance and stability, and detect any red flags. Items inspected here include:

• Balance sheets and income statements
• Inventory schedules
• Future forecasts and projections
• Revenue, profit, and growth trends
• Stock history and options
• Short and long-term debts
• Tax forms and documents
• Valuation multiples and ratios in comparison to competitors and industry benchmarks

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This due diligence step begins as a two-way conversation between buyer and seller. The buyer asks for respective documents to audit, conducts interviews or surveys with the seller, and goes on site visits. Responsiveness and organization on the seller’s end are key to expedite this process. Otherwise, it may create an arduous experience for the buyer.

Following, the buyer examines the information collected to ensure proper business practices as well as legal and environmental compliances. This is the major part of due diligence process. Overall, the buyer gains a better understanding of the firm as a whole and can better appraise long term value.

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Here, the buyer looks specifically at the target company’s business plans and model. This is to assess whether it is viable and how well the firm’s model would integrate with theirs.

After information and documents are gathered and examined, individuals and teams collaborate to share and evaluate their findings. Analysts utilize information collected to perform valuation techniques and methods. This substantiates the final dollar you are willing to offer during negotiation.

 Risk management is looking at the target company holistically and forecasting risks that may be associated with the transaction.