DD is a process whereby a potential deal or investment prospect is checked, investigated or audited. The idea behind is to verify everything that is revealed during the process of M&A & investment.
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Why is DD Important?
A transaction that undergoes the DD process have more chances of becoming a success. DD helps you make decisions based on quality information.
DD enables purchasers to ensure that they’re correct in their expectations. As far as M&As are concerned, acquiring a commercial entity without performing DD significantly increases the purchaser’s risks.
DD is carried out to increase customer confidence. That said, DD can also be beneficial to sellers. Why? Because conducting a thorough financial audit can increase the deal’s financial value.
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Reasons for Performing DD
Reasons for performing DD include:
- Verifying data identified during the investment or transaction process
- Identifying potential risks connected with a transaction or investment-related opportunity
- Retrieving useful info for evaluating a transaction
- Ensuring that a transaction or an opportunity for investment meet the required criteria
DD costs can be influenced by a company’s scale, duration & structure complexity. DD-related costs can be absolutely justified in relation to risks associated with non-observance of a security audit. Usually, buyers & sellers cover expenses related to hiring a team of investment bankers, lawyers, bookkeepers & other consultants.
DD in Acquisitions & Mergers
These are the typical M&A-related questions
- Overview of the target company
- Why do owners want to sell their company?
- Did they try to sell the business before?
- Are there any strategic objectives or a business plan?
- Is the structure of the company too complex?
- Did anybody attempt to purchase/merge the company before?
- What’s the company’s structure geographically?
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- Have the statements of the company been audited?
- What do reports on the financial status of the company indicate?
- What growth indicators can be observed?
- Do the projected indicators make sense?
- How much capital will the company need?
- Which investment-related projects are being implemented & how much investment capital does it have?
- Are there any liabilities & which are their terms?
- Is the company able to cover expenses related to the transaction?
- Technology / Patents
- Are there any patents being held?
- Are there any registered trademarks being owned?
- Are there any copyrighted products/materials being used?
- How are trade secrets being kept secret?
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- Is the company going be able to integrate itself into the buyer's organization?
- What synergy is going to be acquired?
- Are there going to be any new products?
- Target Customers
- Are there any target customers?
- Will there be any risks involved for a consumer protection company?
- Are there going to be any insurance questions regarding consumer protection?
- Management & Personnel Policy
- Current salary structure as far as employees & management are concerned
- Existing bonuses & privileges for personnel & management
- Detailed resumes of the company’s managing and financial directors
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- Legal Issues
- Ongoing, possible & pending lawsuits
- What are the lawsuits all about?
- Is the company facing any lawsuits filed against it?
- Is the company facing any lawsuits instigated by the authorities?
- What software does the company use?
- How much does the company pay for IT services annually?
- To what extent are the current systems being used?
- Corporate Issues
- Verifying corporate & organizational documentation
- Statutory documentation
- Current staff & managing directors
- Holders of shares, corporate rights, & founders contract
- Are there any branches or subsidiaries?
Restructuring and recapitalization documentation
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- Environmental Issues
- Are any hazardous materials used?
- Are there any environmental permissions?
- Are there any environmental claims?
- Are there any obligations to protect the environment?
- Main subcontractors & suppliers
- Monthly Profitability
- Materials utilized during the manufacture process.
- Has the company signed any agreements regarding the testing of its produce?
- Marketing Strategies
- Did the company sign any franchise arrangements?
- What is the company’s market strategy?
- Did the company sign any contracts with distributors, agents or sales representatives?
- What Makes DD So Important?
Reliability check makes it possible for investors to understand what the deal is all about & determine the risks associated with it. In fact, conducting a security check procedure is similar to doing “homework” in relation to a potential transaction and is of great importance for sound investment decisions.
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