Concluding a due diligence process lets potential buyers or investors discover and learn more about a company's operations, financials, and projections before confirming any transactions or investments. The due diligence process is a crucial stage for making any significant transactions or investments, which is especially essential from a mergers and acquisitions (M&A) perspective. Whether you are a buyer or a seller, it is crucial to know precisely just what information disclosed by the other party needs investigation before you can finalize any deal.
In order to manage and arrange important business-related information, M&A specialists construct and research through a wide-ranging due diligence process checklist before they begin structuring the closing deal.
What Is The Due Diligence Process?
The entire due diligence process is a comprehensive evaluation of a business that a prospective buyer or investor usually undertakes before making any decisions regarding investments or acquisition of another company.
When a buyer or an investor deploys the due diligence process, an attorney reviews the focused company's operational structure, business functions, assets, liabilities, and crucial business relationships. Comprehensive data and information on these aspects of a company allow effective evaluation of the deal's strategic and commercial potential, which ensures that the merger or acquisition is valued appropriately.
Similarly, when a seller or company owner deploys the due diligence process, an attorney helps provide suitable documents and information to the buyer or investor. Apart from just providing necessary information about the company and its operations, the attorney also helps manage the due diligence process so that the seller or the owner of the business can continue to run operations and not be inundated by document requests.
Key Factors to Add To Your Due Diligence Process Checklist
Every M&A deal is unique -- and the extent of due diligence process required for a particular subject will differ depending on the company and the changing aspects of the acquisition deal. However, there are certain aspects related to the due diligence process that are primarily included to formulate deals and transactions. Here are eight areas of due diligence process that need to be addressed on any due diligence checklist:
General Matters & Corporate Structure
Company attorneys thoroughly review the business's corporate structure, capitalization methods, organizational documents, and general corporate records of the business to ensure that everything is in place. Some of the materials that are typically reviewed include:
Directories of All?Securities?Holders
Stock Option Contracts and Proposals
Stockholder and Voting Accords
Warranties and Licenses
Stock Appreciation Rights, Policies, and Related Endowments
Recapitalization or Restructuring Records and Files
Minutes From All Board, Shareholder, and Executive Committee Meetings Since Charter
Agreements and Proposals Related to Any Sales or Purchases of Businesses
Typically, corporate lawyers review the company's financial data from the last five years, which includes:
Cash Flow Reports
Additional financial documents and data that may get reviewed includes:
All these above-mentioned documents, data and information are acquired for a duration of the next five years to examine and evaluate whether the company's standing is satisfactory and acceptable.
Taxes and Charges
Tax?due diligence process delves into the company's historical income tax liabilities to provide an evaluation of any tax carryforwards and their possible benefits. Corporate attorneys also verify that the taxes are present in all jurisdictions and that there are no unanticipated tax issues. Some important tax and charges related documents include:
Central, State, Local, and Foreign Income including Sales and Other Tax Returns Filed in the Last Five Years
Correspondence or Notice From Any Foreign, Central, State, or Local Taxing Authority Body
Tax Sharing Contracts
Transfer Pricing Arrangements
Net Operating Losses or Credit Carryforwards
Settlement Records With The IRS or Other Tax Authorities
Tactical and Strategic Fit
In any M&A business deal, future performance and strategic fit are considered as important as the present profitability of the company. As a prospective buyer, a crucial business viewpoint is determining the scope of a company's functions to see if they fit strategically within your existing business or how synergy can be formed in the future. This method of exploring business scopes includes:
Considerations of Human Resources
Integration and Transition
General Work Culture
Intellectual Property and Rights
An intellectual property rights attorney helps you determine the extent and value of the targeted company's expertise and intellectual property, as well as its security and rights. Predominantly, the following documents are reviewed:
Licenses and Licensing Agreements or Contracts
IP Litigation, Claims and Related Documents
Liens or Impediments on The Company's Intellectual Property
The material assets of a company play a critical role in the due diligence process for actualizing any M&A transaction. It's essential to consider the total value of all assets, including any debts or liabilities that are present against these assets. Commonly, the following assets are appraised:
Research and development
Contracts and Agreements
A corporate attorney reviews all material?contracts, agreements?and commitments of the targeted company and is one of the most serious and time-consuming parts of the due diligence process. Generally, the company attorney reviews all the contracts that are presently in force and involve the targeted company. Some of the contracts and agreements include:
Schedule of Accounts Payable and Receivable
Guarantees, Loans and Credit Agreements
Partnership or?Joint Venture Agreements
Distribution and Dealer Contracts
Sales Agency or Advertising Contracts
Litigation and Related Documents
Before purchasing a company or investing in it, it is essential to understand whether the deal would include impending legal liabilities. Consequently, a company attorney usually reviews the following:
Pending, Threatened Litigations
Compliance and Regulatory Matters
Finally, corporate lawyers also review regulatory and compliance issues that involve both the targeted company and the overall deal in general. ?Usually, the anti-trust implications and repercussions of the suggested transaction is reviewed. ?
How TRC Helps With The Due Diligence Process?
Any business or company that considers a transaction must first check all the assumptions about that particular deal. We, at TRC Corporate Consulting, offer due diligence services to company and institutional investors by assessing and validating all the related commercial, economic, organizational, and strategic assumptions.
At TRC, our due diligence professionals offer comprehensive reports on the company's financial and legal stability. It enables vendors with more leverage over the process of selling and the pace of purchases, which in turn supports and secures a better value for their business. Additionally, our due diligence process also facilitates vendor assistance by delivering personalized solutions to help vendors accomplish divestments profitably and successfully. To find more about our due diligence process or other services, contact us!
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