M&A due diligence for POBs

Acquiring a business can be a risky and intricate process. Making the right decisions for the right reasons is essential.

What is a due diligence?

Would you buy a car without knowing its age, mileage, owners, or accident history? Imagine going to a car dealer who would only provide you this information after you sign a purchase agreement. A reasonable buyer would usually request for more information before committing to a purchase.

Doing a M&A due diligence is essentially collecting information before a purchase decision is made.

We have come across a variety of situations where business owners missed the opportunity to conduct due diligence for various reasons, their preconceptions included.

Common (mis)conceptions about due diligence (DD)

Some questions the buyers typically have in mind when considering a purchase are:

  • Do I need a DD?
  • When should a DD be conducted?
  • What should the financial DD encompass?

To help you in your understanding of due diligence, we have addressed a few misconceptions below:

#1 Due diligence is only for transactions that are sizable and not meaningful for smaller deals

Even for deals that are considered small (less than one million dollars), due diligence can be meaningful and offer relevant facts to be considered for a buyer. Imagine a situation where if there is a significant hidden liability that was not discovered, such exposure could potentially be far more than the agreed price for the Target.

➜ Whether it is buying the latest supercar or a family sedan, you would want to drive off knowing that it would give you a peace of mind and that it would not put you or your family in harm’s way.

#2 Due diligence is normally done after binding agreement is signed

Buyers sometimes face the issue of sellers providing little or no information before negotiating and signing a binding agreement. Such resistance to disclosing information should not deter a buyer but explained to the seller, so that both parties can work towards a fair transaction.

Due diligence should typically be conducted before the signing of a binding offer. If done after the fact, such a review of a Target’s financials is referred to as a review of completion or closing accounts, rather than due diligence.

➜ Skipping this process is as good as buying a secondhand vehicle and hoping that any issues discovered later can be fixed with a warranty provided by the seller.

#3 Due diligence is the same as audit or agreed upon procedures

Due diligence goes beyond confirming historical numbers. Not “beyond” in the sense of obtaining more assurance than what is achieved from audit procedures, but rather obtaining information or understanding that is specific to the transaction and the buyer’s concerns.

The objective is very different from an assurance engagement. A buyer should expect findings above and beyond what could be observed from financial statements. This includes understanding the business and how its profit & loss as well as balance sheet would look like normally without non-recurring, one-offs, and other factors in it.

➜ Wanting to know how a car will perform in the future and not just how it performed in the past should be the focus of any potential buyers.

With our expertise dedicated to helping businesses close M&A deals, we can support you through the due diligence process to ensure a successful outcome. Learn more about our transaction services.

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