What Does Due Diligence in Acquisitions Include?Tax Professionals' Resource
April 1, 2013 — 1,481 views
Before a funding agency makes huge investments in private sector operations, they conduct what is known as due diligence. There are risks along with benefits involved in working with the private sector. The risks can be minimized with due diligence. The context of USAID conducting due diligence is the Global Development Alliance. However GDA partners are not subject to the due diligence in the traditional sense as they contribute resources. They do not receive the USAID funding. So, they are subjected to a different due diligence. The due diligence in case of GDA includes five areas that are investigated. These are corporate, social, environmental, financial, and policy.
General Organizational Background
Before a bigger organization proceeds with the merger of smaller organization, they need to conduct acquisition due diligence. They need to do a background check querying on the history of the company, its goals, long and short term objectives, financial needs, and unique advantages.
Human Resources and Management
For a successful acquisition due diligence, human resource and management background must be verified. More specifically, organizational chart, board of directors, advisors, management team, expected changes in the team, employee contracts and agreements, as well as current and future staffing needs must be queried and investigated.
The market in which the company operates must be investigated thoroughly. More specifically the demand, whether the market is mature, trends, opportunities and growth, and market segmentation are some of the issues that will indicate the market strength of the company.
Products and Services of the Organization
Some of the issues relevant to products and services include value to the customers, price and quality, unique strength of products and services, current methods of offering services, availability, competitiveness, and credit terms. Additionally, issues of trade secrets including patents and trademarks are also relevant.
It is imperative to have a thorough understanding of customers – present and future, their buying behavior and loyalty, customer trends, purchase agreements, if any, switching suppliers, and substitute products.
Some of the issues in operations relevant for due diligence include assets and facilities, fair market value and assessed value, equipment needs and future facilities, manufacturing process, level of efficiency through procedures, quality assessment criteria, contracts, suppliers, and raw material.
Acquisition due diligence must investigate competitors, their strengths and weaknesses, whether they are growing, their unique advantage, their plans, and how are they likely to respond to changes in their environment. The strength of competitors on key issues must be evaluated.
It is necessary to investigate the current litigations the company may be facing. The company’s statute, bylaws, amendments, minutes of meetings, honors and awards, stock plans, agreements, regulatory issues, product liability, environmental violations among others must be investigated.
Sales and Marketing
Some of the key sales and marketing issues that need to be investigated include documentation of products/service, sales cost, custom engineering, upgrade obligations, engineering support required and available, size, cost and effectiveness of direct sales team, distribution channels, product pricing, and target markets among several others.
Finance is the lifeblood of any organization, so it needs special focus. In particular, worst case scenario, tax liability, level of insurance coverage, payment record, cash flow and projected financials, audited statements, grants, and sources of funds including their usage must be probed in depth.