The Basics of Due Diligence

Due Diligence is a reason that 62% of mergers or acquisitions fail to meet their financial targets. Fortunately, there are many methods to avoid this happening by ensuring that you are conducting this vital M&A process.

This article examines the fundamentals of due diligence by exploring the different kinds of data which must be analyzed in order to evaluate the health of a company and determine its value. This includes analyzing the competitive landscape of a company as well as its profitability and potential for growth in a uncertain economic environment.

The first step is to look at the consolidated balance sheet of a business, paying particular attention to its cash level and amount of long term debt. This will give investors an idea of how well the firm manages its expenses and if it will be able to meet demand for liquidity in the short-term, even in a difficult economic environment.

It is also crucial to examine the company’s position from the perspective of its strategic positioning which includes the potential for growth of the product lines and market share of the present markets and the strength of its company’s innovation capabilities. Investors should also consider the supply chain of a company in order to determine its risk and capacity in an uncertain market. For instance, how it is able to handle fluctuations in customer demand.

It is important to be aware of the leadership and management of the business. This will enable you to discern any hostile behavior that might affect the acquisition company’s operations after the sale. It is also crucial to understand the cultural differences that exist between the two companies. This will enable the M&A team to develop strategies for overcoming any integration hurdles.

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