What Goes Into Due Diligence in a Business Purchase?

Conducting due diligence is a critical process in mergers and acquisitions (M&A). It consists of the buyer’s meticulous evaluation and analysis of a business or asset before signing a contract. The primary purpose of due diligence is to enable buyers to gain a clear understanding of the target company’s assets, liabilities, operations, financial performance and legal standing before committing to a deal. This comprehensive review helps identify and quantify risks, ensuring informed decision-making and safeguarding investments.

The following are typical areas that should be covered in a due diligence investigation: 

• Financial — Assessing the target company’s financial performance involves a thorough examination of financial statements, accounting policies, cash flow, debt levels and revenue streams. Financial analysts look for any discrepancies, unusual patterns, or potential red flags that could impact the valuation and future performance of the company. They also evaluate the company’s financial projections to determine if they are realistic and achievable.
• Legal — Determining the legal aspects of the target company includes reviewing licenses, contracts, regulatory compliance, intellectual property rights, and pending legal liabilities. Legal consultants assess whether the company is involved in any litigation or regulatory issues that could pose risks post-acquisition. They also examine the company’s contractual obligations to understand potential liabilities and the legal implications of existing agreements.
• Operations — This evaluation provides forward-looking insights into the company’s operational efficiency, supply chain management, production processes, and overall workflow. Operational specialists identify areas where the company excels and where improvements are needed. They assess the scalability of operations and the potential integration challenges that may arise post-acquisition.
• Taxes — This component evaluates the target company’s tax liabilities, compliance with tax laws, and any potential tax risks. Tax experts analyze historical tax returns, tax strategies, and the impact of a merger on future tax liabilities. They also consider the tax implications for the new entity created by the transaction, so that the merger can be structured in a tax-efficient manner.
• Commercial — This area of scrutiny provides insights into the target’s strategic positioning and its ability to sustain and grow its market share. It involves analyzing market trends, competitive landscape, customer base and the company’s business model. It also assesses the strength of the company’s brand and its market reputation.
• Technology — Ensuring that the target company’s technology assets are robust, scalable requires evaluating its IT infrastructure, software, hardware, and cybersecurity measures. Technology specialists assess the risks related to technology obsolescence, data security breaches and the ability of the technology to support future growth.

Conducting thorough due diligence requires assembling a team of professionals with expertise in various fields. This team typically includes financial analysts, operational specialists and legal consultants. Each professional brings a unique perspective and skill set to the due diligence process, ensuring a comprehensive evaluation of the target company. 

Law Offices of Donald W. Hudspeth, P.C. in Phoenix represents companies of all sizes in M&A transactions throughout Arizona. Call us at 866-696-2033 or contact us online to schedule a consultation.