Due Diligence is the reason that 62% of mergers and acquisitions fail to meet their financial goals. There are a myriad of ways to avoid this outcome.
This article outlines the fundamentals of due diligence through a review of the different kinds of data that must be analyzed to determine the health of a company and determine its worth. This includes evaluating the competitive landscape of the company, profitability, and potential for growth in an uncertain economic environment.
The first step is to look at the consolidated balance sheet of a company with particular attention paid to the cash balance and the amount of long-term debt. Investors will be able to determine how the business manages its expenses and if they can deal with cash demands on short-term basis in a difficult economy.
It is also crucial to assess the company’s position from the perspective of its strategic positioning which includes the growth potential of the product lines and the market share of the present markets and the strength of the innovations capabilities. Additionally, investors should look at the supply chain of a company to determine its capacity and risk in a volatile economy, such as whether it can handle fluctuations in demand for its products.
Alongside analyzing data, it is vital to be aware of the management and leadership. This will allow you to identify any hostility which could affect the acquirer’s operations following the sale. It is also important to know the cultural differences that exist between the two companies. This will enable the M&A team to develop an approach to overcome any integration challenges.