For larger transactions it’s a must, whether private equity or a trade acquirer and it is necessary in order to provide sufficient comfort not just for management, but for shareholders and other stakeholders that company directors are responsibility for.
For larger transactions, for instance with larger groups and those with international operations, it can be a challenging involved process, and will inevitably take-up resource and management time even with extensive external support from advisory firms such as UHY. This is why many larger companies have internal specialists and dedicated teams to identify opportunities and manage transactions through to completion and often for post deal integration.
Due diligence will cover all material relationships of the company covering specific areas, examining the assets, contracts (supplier, customer and internal) and financial performance of the business. Specialists whether internal or external can include legal, accounting, environmental, operational, technology and other key relevant areas. UHY Hacker Young provides financial due diligence covering aspects including; accounting, tax, VAT and any related financial area necessitating an evaluation.
It is normal practice to restrict access to company information during a transaction due to confidentiality and in particular when it is market sensitive information. Providing access to information is typically increased as the process progresses, with more detailed company material is provided when there is one favoured party. Even so, the ultimate acquirer needs to get to a point of comfort and not to blindly proceed if they still have an itch to scratch, so it is also up to the acquirer to manage the process and ensure they have scratched and applied sufficient due diligence ointment where necessary.
Nonetheless, due diligence can still only go so far and there are usually matters that only become apparent once you get the keys, so to speak. However, if your due diligence has been completed properly the main risks and ‘potential’ risks should have been identified. Whether these are large or small risks they can effectively be mitigated against by post deal planning and integration, although certain business and market risks will remain as its part and parcel of doing business.
One thing that is for sure is that it’s unlikely that an acquired company will come ‘squeaky’ clean, there will be forgotten cupboards that need a good spring clear-out and other areas of home improvement not identified during due diligence.
As explained above, for larger acquisitions due diligence is a must, but for smaller acquisitions or if at an early stage of a competitive bidding process - what level of due diligence is the right level?
In essence, it requires a more flexible approach to suit the situation and need. UHY understands these tensions and we tailor our approach to meet the circumstance and client’s requirement. This can be of limited scope to begin with, moving to full financial due diligence later, or full financial due diligence if preferred, even if considered a low risk transaction.
We aim to identify areas of concern early on and to work jointly to deliver the deal or if it’s not right, for whatever reasons, be prepared to walk away and move on. We want our clients to prosper whatever the situation and have recently completed two financial due diligence projects, both buy-side; the first on an IT service company which recently completed with the 100 day post deal plan underway and going well, and the second on a medical company, where we were outbid. It often happens, but better to be outbid and be disappointed knowing your position, rather than paying too much and regretting the decision later on, or withdrawing at a much later stage.
The next step
We support private equity, personal investors and SMEs. Should you require Financial Due Diligence and want a cost effective tailored approach please get in touch with Rob Starr or your local UHY adviser.
