M&A due diligence

M&A due diligence is an important part of the M&A process. It involves assessing the value and viability of the target company and the proposed transaction. This includes collecting information about the target company’s operations, finances, legal structure, management team, competitors, and customers.

What is the meaning of M&A due diligence?

M&A due diligence is the process of investigating a target company. It consists of several elements, including Business, financial, and legal investigation and Asset and liability review. 

When conducting M&A due diligence, you’ll need to look at all aspects of your target’s business as well as its financial health. This will include examining their balance sheet as well as their cash flow statements; it will also involve an assessment of risk factors such as litigation risk or intellectual property infringement issues that could affect profitability in future years (or even months). You should also perform legal research on any contracts or agreements that might impact the acquisition process moving forward—this includes leases on real estate properties used by your target company, the licensing agreement with third parties who produce goods sold under their brand name (such as toys), etcetera).

M&A due diligence report 

The final report includes combining, tabulating and analyzing the information received until now. By conducting due diligence, the buyer company understands what it is getting in terms of IP in any M&A deal and ascertains whether the buyer is not overpaying for such IP.

M&A due diligence checklist

Here is a checklist of items to be included in the comprehensive M&A Due Diligence:

Company profile

Company profile, Financial statements (including audited financials), and tax returns (including tax opinions). 

Company History

Company history, including any significant events that may have occurred since the last audit or review. If there have been changes in management or ownership since then, please provide an updated list of all officers, directors, beneficial owners, and individuals holding more than 5% of your company’s stock (if applicable).

Structure chart

Structure chart showing all companies involved in this transaction with their respective percentages owned by each party. Please include all entities involved as well as any individuals who will hold shares or debt securities after closing.

Ownership structure 

Provide details for M&A Due Diligence on how control over your organization is currently exercised by its shareholders/members/partners; describe how they intend ownership will be exercised after closing; provide evidence that any necessary approvals have been obtained from third parties such as lenders who may need consents before releasing funds related specifically toward this acquisition transaction.* Operations & Management – Describe what makes up your core business model. Who do you compete against? What kind of customers do you serve? How are products produced/delivered? Are there any unique aspects of these processes that might affect how competitors operate differently?”

Example of M&A Due Diligence Process

The process of M&A due diligence is a detailed investigation of the target company, to ensure that the buyer is acquiring the assets and liabilities that it expects to acquire. It involves assessing legal, financial, and operational risks associated with an acquisition.

M&A due diligence is a critical part of any merger or acquisition. The main purpose of this exercise is to identify all material issues before signing an agreement and becoming legally bound by its terms.

M&A Due Diligence Process

The M&A due diligence process consists of three main steps:

Preparation 

Preparation involves gathering the necessary information, preparing the team, and performing preliminary analysis.

Inspection

Inspection is when you go out and physically inspect all aspects of your target company. You may even have to visit locations outside your country if they are involved in a cross-border deal.

Analysis and reporting

Analysis and reporting, where a detailed report will be prepared to summarize all findings from both previous steps as well as recommendations for further action (if any).

Type of Due Diligence

There are several types of due diligence. This section covers the most common, but your specific situation may require one or more additional types of due diligence:

Financial Due Diligence 

Financial due diligence is performed to assess the financial health of a business before it is acquired. It includes an analysis of historical financial statements, projections, and forecasts (including pro forma), as well as an assessment of current assets and liabilities; cash flow; capital structure; tax position; contingent liabilities; off-balance sheet risks such as mortgages or leases on property held by third parties (such as equipment leases); derivatives contracts (swaps) entered into by either party that could affect its ability to service debt obligations after closing; potential liabilities associated with intellectual property rights owned by either party before the closing date (e.g., patents).

Importance of IP due diligence

Three essential characteristics of IP due diligence are as follows:

Determine the value and cost

Determining the cost and value of intellectual property is the trickiest part as its value is based on the present market conditions and no other physical determinants. The IP due diligence helps to determine the value of the IP.

Also, IP due diligence helps investors to determine the cost of intellectual property. The cost involves marketing/branding costs, registration costs, legal fees, and the like.

Protection from risks

Conducting IP due diligence helps both the buyers and sellers to understand the risk involved in dealing with intellectual property and to further to find solutions on how to protect themselves from these risks.

Avoid defects

IP due diligence helps avoid defects by validating each assumption made in determining the value of the intellectual property and helps create a fair bargain in an M&A deal. 

Cost of Due Diligence for Merger and Acquisition (M&A) Transactions in India.

The cost of the M&A due diligence process depends on the size of the transaction and the parties involved. If you are buying a company with annual revenues of $100 million, it may cost between 1% and 3% of this amount to perform due diligence.

This cost will usually be charged as an hourly rate by your lawyers or other third-party providers who conduct such work.

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Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

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