Due Diligence is a legal term used for an inquiry or investigation into a merger or acquisition. During the process, a potential buyer or partner will look into the holdings and claims put forth by the seller about their company. In the case of a merger, both sides will be doing investing using an accredited Acquiring Firm to ensure that the partnership will be a sound investment. This form of Merger and acquisitions is quite complex, and because of this reason, it isn’t defined by just one type of corporate due diligence but by several different types all of which play a part in the different aspects of the merger and acquisition process.
Financial: Perhaps the most important and lengthy part of this process overall. It is through the financial due diligence that a buyer will find out not only the profit but losses of the company in a length of time. This will include a clear picture of the customer base, whether they have picked up new customers or have lost some. It gives a clear picture of their profits or losses as well, letting it be known if the company is a sound investment. That includes seeing the tax returns for a certain length of time, which tells the story of how the company was doing during a certain financial year, including what losses they claimed.
Administrative: Under this phase, the various locations and facilities are examined. It is evaluated if all the functions along with the cost of operation are clearly defined in all the paperwork presented. During this step, it is determined if the cost of operating the facilities is worth it to the buyer.
Assets: Another key factor, even if financially the company may have taken a loss of what kind of assets do they have. It is possible that this could still lead to the merger or acquisition taking place, such as just having some prime locations where the business is being run. During due diligence, this step looks into what classifies under assets and whether the company has any worth making it still a valuable investment.
Human Resources: This part of due diligence will also be quite extensive. There would be many factors in which to look into, just beginning with the number of individuals currently employed through the company. There is also the current salaries of each of the employees, whether they receive any type of benefits such as healthcare. There is also looking into the issues of employees including whether there have been any recent labor disputes, the employees’ contracts and what policies the HR division currently has in place.
Environment: Sort of goes hand and hand with HR, this one goes into the type of work conditions. Whether these meet proper labor guidelines and whether there are any violations that could shed negatively on the company, leading to it being shut down at any of its facilities. This also covers the sanitation and disposal methods by the company ensuring a safe workplace for employees and a safe sanitary place for customers wot come to do business.
Legal: Another important part of due diligence, with this phase all the legal aspects are covered in examined. This would include all contracts involving the companies operations, certificates of operation, licenses, franchise agreements, loan agreements, banking agreements and even board minutes. Anything that pertains to the legalize running of the companies day to day operations.
These are just some of the key parts of due diligence. Needless to say, it is a very long-drawn-out process. But when it comes right down to it, the main question that would need to be asked in such a merger and acquisition is will it be a good fit? Is the investment worth the risk overall? Well, one the corporate due diligence process is completed, these are certain questions that a buyer will have an easier time determining.