The Role of Due Diligence in Mitigating Risks in M&A Deals

Due diligence is an integral part of any M&A transaction aimed at getting full insight into all aspects of the target company, including its structure, finances, operations, marketing, legal and other aspects. During the due diligence process, the parties outline diverse internal and external risk factors, mitigate various non-compliance issues and lay out their acquisition strategy. 

Given the complexity of modern business structures, the implementation of the due diligence for M&A can be a much smoother process when based on a proven framework and assisted with digital tools. Keep reading to find out more about the role of due diligence, learn about due diligence methodology and discover why entity management software is instrumental for successful M&A transactions.

Due Diligence Is Critical for Deal Making

While some M&A deals may fall through due to changes outside the parties' control, other deals fail because of incomplete analysis or misleading information. The due diligence process is intended as a preventative measure to avoid these risks by gathering all necessary data about the sale and helping buyers make educated decisions.

Since most M&A transactions are private, the parties need to take steps to ensure the availability of comprehensive data related to various aspects of the transaction. The buyers and the sellers can provide for completeness of such information by closely following a due diligence checklist, leveraging expert teams, and applying technology, such as entity management software, to streamline the assessment.

When the buyers obtain an accurate valuation of the target company, they can better negotiate the transaction and make informed decisions. Meanwhile, completing due diligence enables the seller to have a realistic market assessment, fix existing issues with structuring or compliance and improve their offer.

The Required Scope of Due Diligence for M&A Deals

One of the greatest challenges of due diligence assessment for M&A is knowing which questions need to be asked. Meanwhile, a failure to address all the aspects of the transactions leads to made-up due diligence, skewed interpretation of risks and distorted valuation.

Mitigating risks in M&A through due diligence is only possible by following a detailed and structured checklist. Such checklist should address multiple facets of a target company, including:

  • Organization structure, providing a full overview of the whole company, including all its entities, their types, jurisdictions, percentage ownership and ownership connections down to ultimate beneficial owners,
  • Legal, including a summary of applicable regulations, permits and authorizations, copies of contracts, a summary of litigation and an overview of intellectual property rights, 
  • Taxation, covering tax liabilities of the target as well as tax consequences of the potential deal,
  • Finance and accounting, including financial reporting, description of bookkeeping policies and procedures, financial plans and operating budgets,
  • Operations, including asset inventory and summary of undertaken and planned capital expenditure,
  • Information Technology aspects, covering key technologies and IT resources, software and hardware, contracts with vendors, security protocols and data privacy policies,
  • Marketing and sales, describing sales channels, marketing strategy, top customers and copies of customer contracts,
  • Human resource information, including employee roster, policies, employment agreements, employee benefits and any other relevant information.

How Does Entity Management Software Facilitate Due Diligence? 

Addressing all the above aspects of an organization having multiple entities can be a challenging task, especially if the target lacks an effective entity management system. When sellers run entity management relying on manual processes or have disorganized books and records,  it can considerably increase the time and professional fees associated with the due diligence.

According to the 2021 report by Deloitte, poor entity management practices have negatively impacted the outcomes of deal-making, jeopardizing the credibility of the sellers, slowing down deals, increasing risks and driving the deal price down. 

Conversely, when the sellers leverage modern technology and entity management software, they can rip multiple benefits providing better outcomes for the transactions.

Better visualizing the target structure for due diligence

When sellers leverage entity management software, they can automate their org charting for better presentation and visualizing the target structure. When the org charting process is automated, the parties can easily trace connections among parents and subsidiaries, navigate complex ownership relationships, visualize percentage ownership and other details and have a birds-eye view of the whole organization in several clicks.

Creating a single source of truth for corporate records

Entity management software provides the parties with a single source of truth about the target company available from anywhere on any device. A centralized cloud repository for corporate records allows providing access rights to internal and external due diligence teams sharing information instantly, and facilitating the deal assessment through well-organized data, intuitive graphic interface and automated reporting.

Streamlined due diligence and decreased professional fees

Utilizing entity management software like Athennian helps sellers avoid issues with their subsidiary management, including late filings, non-maintained or abandoned entities, non-compliant director appointments, and more. In turn, improved entity management streamlines due diligence, cuts the time for the valuation and decreases professional fees.

Increased buyer confidence

When corporate books and records are organized via application of modern technology, it creates confidence for the buyers. Such approach to entity management conveys confidence in the target company's governance and compliance program, facilitates decision-making, smoothens the transactions and finally leads to a better offer. 

Learn More About Due Diligence for M&A with Athennian 

Implementing effective due diligence for M&A facilitated by entity management software helps parties mitigate risks and improve the outcomes of their deal-making. That said, achieving these goals requires careful planning for the due diligent process while addressing all aspects of the business organization.

The Athennian team has extensive experience assisting businesses in running their due diligence through the application of entity management software and is happy to share a comprehensive framework for M&A valuation. For more guidance on implementing deal valuation, please download the Athennian Due Diligence Checklist for the M&A transactions.

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