Due diligence is the reason that 62% of mergers and acquisitions fail to meet their financial goals. Fortunately, there are many ways to avoid this fate by conducting this crucial M&A process.
This article explores the basic principles of due diligence by looking at the various types of data which must be analysed in order to evaluate the health of the company and determine its value. This includes analyzing the competitive landscape of the company and profitability, as well as the potential for growth in a uncertain economic climate.
The first step is reviewing the consolidated balance sheet of a business, paying close attention to the cash balances and the amount of long-term debt. This will provide investors with an indication of how well the firm manages its expenses and whether it is likely to be able to handle short-term liquidity demands, even in a difficult economic environment.
It is also important to assess a company’s strategy position, which includes the growth potential of its product lines, market share in its current markets and the strength of its innovation capabilities. Investors should also think about the supply chain of a business to assess its potential risk and capabilities in an uncertain economy. For example, whether it can handle fluctuations with customer demand.
It is important to understand the management and leadership of the business. This will help you identify any hostility which might affect the acquisition company’s operations following the sale. It is also crucial to be aware of the cultural differences that exist between the two companies. This will help the M&A team develop a strategy to overcome any integration hurdles that might arise.
