The M&A process can be long and complex. Buying or selling a company requires meticulous planning, experienced professionals, and an appreciation of the deal dynamics involved in negotiations.
Companies that have not been involved in previous M&A transactions commonly make mistakes that result in mispricing, unfavourable terms or a failure to complete – which could have otherwise been avoided. This article describes the minimum financial due diligence that acquirers must undertake. Examining these factors is vital in order to know exactly what you are committing to buying.
Key Financial Due Diligence in Mergers and Acquisitions.
Examine the annual and quarterly financial statements for at least the past three years and determine the following information:
- Understand what the statements imply about the financial performance of the company. For example, are profit margins increasing or decreasing?
- Inspect the health of the company’s assets and the extent of their liabilities. This includes identifying any issues in accounts receivable, and analysing the terms of outstanding debt.
- Has EBITDA been suitably calculated? This is especially critical for buyers using debt financing because it will impact ROE.
- Have historical projections been close to actual performance?
- Has working capital been appropriately calculated?
- Have the financial statements been audited?
Given the financial metrics, you should be able to discern:
- If the purchase price is fair and if the information provided by the agent is reliable;
- If the company has enough financial resources to sustain operations and if extra capital will be required to continue the growth of the business;
- If future projections are reasonable given their underlying financial assumptions;
- If current and future tax consequences are favourable; and
- If the purchase agreement should include any deal breakers or guarantees.
Management Advisors Pty Ltd is a highly sought after independent financial services firm. Their team has extensive experience in initiating, sourcing and negotiating M&A transactions to completion.
