The Basics of Due Diligence
Almost 62% of mergers and acquisitions fail to realize their financial goals because due to inadequate Due Diligence. There are a variety of ways to avoid this outcome.
This article explores the basics of due diligence, by looking at the various types of data which must be analysed to evaluate the health of a business and determine its worth. This includes evaluating the competitive landscape of the business, profitability, and potential for growth in a uncertain economic environment.
The first step is to examine the consolidated balance sheet of a business and pay close attention to its cash reserves and the amount of long-term debt. Investors can see how the business manages its expenses and how they meet short-term cash needs in a challenging economy.
It is also important to examine the company’s position from the perspective of its strategic positioning which includes the potential for growth of the product lines, the market share of current markets and the strength of the innovation capabilities. Investors should also think about the supply chain of a business to assess its risk and capacity in an uncertain economy. For instance, how it is able to manage fluctuations in customer demand.
It is important to understand the leadership and management of the business. This will help you identify any hostility that could flow through to the company that is buying it and impact its operations after the sale. It is also important to understand the cultural differences between the two companies. This will assist the M&A team to develop a plan to overcome any integration hurdles that may arise.