The aim of conducting due diligence is to inspect and evaluate all affairs of the target company such that you can make an informed decision about whether or not to proceed with a merger or acquisition.
For that, you’ll need to unearth as much corporate data as possible. The first and most obvious point of call is to review finances, assets and sales figures. But you’ll also need to look carefully at liabilities and potential liabilities from personnel records and customer data.
Bear in mind that not all data will be open to you from the outset. As you get more serious about the merger or acquisition, you can request more sensitive proprietary information.
6 steps to conducting due diligence on your target company
1. Centralise your information
Request the vendor to create a secure virtual space for all information to be organised and shared between the target company, the vendor, and due diligence experts.
It should be well-indexed, searchable and easily accessible for all concerned parties. This will not only help to speed up the due diligence process but will also make communication as transparent as possible.
Creating a centralised document management system that is only accessible to authorised persons will help to mitigate the risk of sensitive information getting into the wrong hands.
2. Review corporate financial information
Hire an accounting expert to review the following:
- Annual financial statements, ideally over the past five years.
- Cash flows, outlining the sources and uses of cash reserves.
- All expenses, including non-operational expenses that are sometimes left out to inflate the perceived operational earnings.
- Public filings (if applicable).
Ask for a breakdown of filings by category and by period so that you can more easily review the data, spot trends and anomalies.
Look out for large one-off events that are unlikely to repeat themselves, for example, a sale to a major customer. Don’t include them amongst regular, recurring operational events.
3. Evaluate the target company’s structure and practices
Make sure that the target company presents legal documentation such as articles of incorporation, licenses, permits and corporate or association bylaws.
Get a full list of the names of board members and shareholders, territories where the company conducts business and clear documentation of the organisational structure of the business.
Review third party relationships such as partnership agreements, current and recent supplier and vendor relationships.
4. Review all assets
All fixed assets and their locations should ideally be physically verified. Include lease agreements, real estate deeds, mortgages, use permits, title policies and all documents relating to major capital sales and purchases over the last five years.
Request a complete inventory and related documents of manufacturing equipment, office equipment, raw materials, etc.
Include intellectual property. Verify the ownership and status of intellectual assets, and get a valuation of the assets and determine liability for infringement.
Make sure all registrations are up to date and that there is a clear chain of documentation from the creator to the existing owner. Ensure documents are recorded in (and match with) public records.
As well as asking the vendor to supply these, it’s also advisable to review public records to conduct your own research.
Get a list of any contracts that permit others to use the target company’s assets.
Examine confidentiality agreements to ensure the target company has taken due caution to prohibit them from disclosing trade secrets.
5. Review brand health and key competitors
The target company’s brand is likely to be its most significant intangible asset. As such brand health is worth exploring separately.
Determine the target company’s position within its industry from the perspective of the consumer. The Symanto Insights Platform enables you to upload thousands of posts and comments from social media and review sites so that you can get an objective view of how the target company’s brand fares against its main competitors.
- Discover the targets share of voice by comparing brand mentions online.
- Identify key moments in the brand’s history by viewing brand mentions over time. Spikes in mentions can point you towards campaign successes and PR disasters.
- Find out how public sentiment compares with key competitors.
- Break down public sentiment by topic to identify pain points, strengths and challenges facing the brand.
- Identify the personality traits that define the target’s customer base, and find out if they occupy a niche in the market.
6. Investigate unresolved litigation
The last thing you want to do is inherit outstanding liabilities and an obligation for legal fees. The due diligence process should evaluate the threat of a lawsuit that could surface after acquisition.
Unresolved disputes could arise from employees, customers or vendors. Intellectual property disputes are also a threat. For resolved matters, review what the settlement agreements entailed.
Get started with The Symanto Insights Platform
The Symanto Insights Platform specialises in step five of the commercial due diligence, but it doesn’t need to be done in order. In fact, you can get a head start on the due diligence process by gathering and analysing publicly available data.
With this one tool you can gather and analyse thousands of data points from freely accessible sites online to help you assess brand health and conduct a competitor analysis.