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What are the Best Tips for Acquisition Due Diligence?

By Osmand Vitez
Updated May 17, 2024
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Due diligence is a process companies go through when conducting a major transaction, such as a business acquisition. The purpose of this acquisition due diligence is to ensure that neither party involved in the transaction incurs unexpected results. To properly conduct due diligence, companies should conduct several meetings with the head of other companies, hire an external auditor for the process, create a timeline for completing the process and develop a list of red flags that may result in a termination of the agreement.

The business acquisition due diligence process is often quite lengthy and intense. Companies will engage in mergers and acquisitions to improve their business relationships or advance their products in a free market environment. Both management groups should meet extensively prior to entering the acquisition due diligence process. Through these meetings, both management teams will be able to state their goals for the process and dictate what they expect from the other group. During these meetings, owners and executive managers should make all their intentions and expectations clear. Failure to do so can result in lost opportunities for making the company stronger.

Hiring an external team or firm to conduct acquisition due diligence can help secure a formal objective opinion. External candidates for this process include management consultants and professional auditors from accounting firms. These individuals often have a particular skill set that allows them to remove copious amounts of paperwork and information relating to an acquisition. In most cases, both companies may have to agree on the external group conducting the acquisition due diligence. This ensures that one firm cannot secure an advantage over the other by using a consultant or accounting firm familiar with the company.

Timelines are important for mergers and acquisitions, as waiting too long to close the deal can result in lost business opportunities. Additionally, companies can wind up spending much more capital than they initially planned for the acquisition. Companies will often create multiple timelines. This allows for a step-by-step process to ensure no information is left out of the due diligence process. Timelines will often include a fail date that will kill the deal if certain measures are not met during this process.

Another tip for the acquisition due diligence process is to create a list of red flags. These are particular deal breakers that a company will not accept in a merger or acquisition. Flags often coincide with the timeline to ensure companies do not waste time on this process. Red flags are not always illegal; they are simply financial, legal or business operations a company will not accept in an acquisition.

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