Acquisition due diligence

Make sure your planned acquisition will be a profitable deal for you, and avoid nasty surprises.

What is acquisition due diligence?

Acquisition due diligence is the process by which you gather information about a business you are planning to acquire, so that you enter into the purchase with full knowledge of all the relevant facts.

To ensure that the investigation is thorough, most prospective purchasers rely on trusted advisors who are experienced in acquisitions to guide them through the process. TCii has fulfilled this role for many clients who have gone on to make successful, profitable acquisition deals.

The key phases of acquisition due diligence

The first step in due diligence is to evaluate the deal to assess the key risks and opportunities. Based on these findings, you then need to carry out a detailed investigation in four critical areas:

  • financial
  • legal (including environmental concerns)
  • marketing/commercial
  • cultural.

Financial and legal due diligence involves the examination of four key areas: assets, liabilities, cash flow and revenue, and growth rate.

Marketing/commercial due diligence involves taking a hard look at your assumptions regarding the company’s future revenue growth and profitability, as well as assessing the market’s key leverage points and how those might be changing.

Cultural due diligence means researching how the organisation is run; how management reviews, evaluates and rewards employees, and how management sets performance expectations.

To conclude the due diligence process we recommend creating financial projections using different scenarios. To “pro forma” the deal:

  • List all your assumptions in detail.
  • Re-examine the potential synergies.
  • Do two-to-three-year cash flow pro formas.
  • Decide whether the projections indicate a workable deal.

Due diligence checklist

The checklist of items you need to cover during due diligence is very long and detailed, but you must ensure that your due diligence team pays close attention to all of them. The items on the list fall under 12 main headings:

  • Corporate and legal
  • Finance
  • Human resources and pensions
  • Information technology
  • Intellectual property
  • Operations, procurement and safety
  • Risk management
  • Sales and marketing
  • Tax
  • Quality control
  • Regulatory affairs
  • R&D and product development.

Please contact us if you would like more information about the full checklist.

Tips for effective due diligence

To enhance your overall due diligence efforts, you need to create a cross-functional due diligence team. Every team member should put the following questions to people at all levels in the company you are proposing to acquire:

  • What are the three biggest problems in this business?
  • What are the three biggest opportunities in this business?

Take care to avoid the two biggest due diligence mistakes:

  • having too much confidence in the company’s future revenue growth and profitability, and
  • misunderstanding the business you intend to acquire.

Finally, keep your “bullshit” detector turned on high!

Next steps to minimising your acquisition risk

To learn more about how thorough acquisition due diligence can give you the necessary reassurance or prevent a disastrous deal, email us or call us on 020 7099 2621.

See also our guidance on mergers and acquisitions and post-acquisition integration.