Corporate buyers, when considering the acquisition of a company, will begin the due diligence process. This process of examining the target company’s financial statements, legal documents and other corporate records allows the potential buyer to gain a complete assessment of the company in order to decide whether to move ahead with the acquisition.
The due diligence process usually revolves around the most important financial documents. However, as some acquisitions are also strategic in nature, the buyer also needs to fully understand what the future might look like once the acquired company’s operations are folded into those of the acquiring company.
Acquisition due diligence focuses on providing the acquiring company or investors with a thorough understanding of the company’s operations, usually in the following areas.
Earnings and Profits
The acquiring company will want to evaluate not only the target company’s EBITDA (earnings before interest, taxes, depreciation and amortization) but also any particular anomalies in financial reporting, such as the application of regional accounting rules. How assets, income and liabilities are treated is important, as the acquiring company will be adding these to its balance sheets. The more complex the target company’s balance sheet, income statements and other reporting documents, the deeper the acquiring company will go to better understand the financial picture.
Sales and Revenues
The acquiring company wants to know that sales and revenues will continue at the same pace, or perhaps even at a faster one, once the transaction closes. While an analysis of the balance sheet is important, understanding how the company to be acquired conducts its commercial practices and generates its income is perhaps even more crucial. A deeper look at recurring revenue, customer churn, sales processes and industry competitors would be included in the acquisition due diligence process because the buyer wants to have the most complete knowledge of how sales and revenues will be achieved once the ownership structure changes.
Human Capital Investments
While human capital can be an asset to an organization, it can also be a liability. The buyer, while conducting acquisition due diligence, will also want to understand not only how much the target company spends on human capital but additionally how much those investments are directly connected to revenue. Salaries, bonuses, benefits and compensation are important to understand, in addition to investments in training, recruitment and advancement. Companies that are acquired usually experience a shake-up not only in their corporate ranks but also throughout the organization, and the acquiring company needs to understand how the company will continue its operations without disruption once the transaction has closed.
Technology and IP
Further to the assessment of costs and liabilities, acquisition due diligence will also uncover investments in technology. This is more than simply an inventory of hardware, software, networks and connectivity; it is also an examination of how these investments have been incorporated into product and service delivery, and whether the target company’s investments in IT and development are actually part of the company’s intrinsic value.
Virtual Data Rooms for Acquisition Due Diligence
A prospective buyer wants to know that any and all documents are accessible without friction or compromise while performing acquisition and other types of due diligence.
More than simply offering cloud document storage and management, a virtual data room (VDR) includes the highest levels of security to ensure that document sharing is free from misuse or compromise. Both parties need 99% uptime and the ability to access documents and data anytime, anywhere, and on any device.
Organizations should consider an enterprise document security solution like Caplinked that has years of experience providing data rooms for organizations needing privacy as they engage in sensitive and complex M&A transactions. Ready to see how Caplinked can help streamline your due diligence process? Start your free trial today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.