Due Diligence for Mergers and Acquisitions

Article by Vinita Prajapati

A review, audit, or inquiry that is carried out to verify the truth or the specifics of an issue under consideration is referred to as “due diligence” for mergers and acquisitions. Before engaging in a proposed transaction with another party, financial due diligence calls for a review of financial documents.

Objectives for exercising due diligence

• There are various causes for conducting due diligence:
• To ensure that the deal or investment opportunity satisfies the investment or deal criteria.
• To confirm and verify information that was brought up during the deal or investment process.
• To identify potential flaws in the deal or investment opportunity and avoid a bad business transaction.

Investigating and auditing the corporations intending to engage in the transaction is necessary for mergers and acquisitions. Depending on the countries the two corporations belong to, several legal and regulatory conditions must be met before the transaction is completed. Several of them have to do with taxes, laws governing foreign investments, laws governing foreign exchange, legal disputes concerning the business of the two parties, the transfer of intellectual property rights, international taxation, laws relating to corporate social responsibility, labour laws, banking and insolvency laws, etc.

Every merger or acquisition’s due diligence includes the following points:

• Identifying potential risks involved with each corporation by evaluating financial, legal and operational performance.
• Review earlier contracts, filings and other documents or conversations with the regulatory authorities governing the two entities.
• Reviewing the validity of intellectual property
• Identifying potential disputes & litigation

The buyer must understand what it is purchasing, the commitments it will take on after the purchase, the nature and scope of the target company’s liabilities, legal concerns, intellectual property issues, etc.

Procedure for exercising diligence

Due diligence can be carried out in two different ways:

• In the first approach, the seller company provides the buyer with predetermined data in a data room.
• The second method is to analyse the seller’s information in response to the questionnaire.

Before deciding whether or not to enter into a deal, significant work must be done after the preparation of the due diligence report.

Each party must create a term sheet outlining the conditions to be met before both parties can sign the contract. Before engaging in the transaction, it defines the terms the parties desire to include.

Both parties must agree to the terms before proceeding with the transaction.