Indeed, when an acquisition seems logical, even natural, it's sometimes difficult to curb one's enthusiasm and commit to rigorous, pragmatic due diligence. This audit can, however, avoid dramatic financial consequences and provide a guarantee in the event of problems.
The process of carrying out an in-depth examination is known as due diligence.
In its simplest form, this involves gathering, interpreting and evaluating all available information about the proposed business, the company, its activities and the environment in which it operates, all of which will enable you to make an informed decision before investing.
One of the main objectives is to identify the risks associated with the planned investment, in order to adjust the transaction price or put in place a risk mitigation plan. In both cases, a clear understanding of the facts is essential.
Due diligence is not an exercise in futility. It serves to bridge the information gap between a potential buyer and a seller regarding the quality of an asset. The seller knows the company inside out, whereas the buyer only has access to public information about it. There are therefore as many due diligences as there are transactions, and each one raises a whole series of questions.
What are the most important points to analyze in your target audience?
To make your future acquisition a success, the following points must inevitably be considered
Analysis of the target's financial situation
In addition to the general aspects relating to the accounting principles applied in comparison with those of the future acquirer, particular attention should be paid to the target's historical performance (past), and to the comparison of actual performance with forecast performance (present and future).
The analysis of the target's financial position includes a review of :
- historical performance in terms of profitability ;
- historical net worth and assets ;
- performance forecasting and analysis of forecast data and business plans.
This multi-criteria analysis of financial data is a key stage in the due diligence process. The aim is to determine the adjustments to be made to the target's net worth, based on the quality of its assets and any liabilities that may not have been recorded.
An analysis of historical performance enables the future buyer to fully appreciate the revenues generated and their evolution over the period under review, as well as the structure of operating expenses and the recurrence or non-recurrence of certain items.
Lastly, when comparing actual with forecast performance, the aim is to assess the main forecasting assumptions used by the target and the consistency of the business plan. The aim is to assess the reliability of the budgetary approach adopted.
Social, tax and legal aspects
Generally speaking, in addition to financial aspects, analysis of social, legal and tax risks should be included in the scope of due diligence.
- As far as social aspects are concerned, these relate more specifically to labor law and human resources, so that the purchaser can assess the compensation policies applied by the target, the benefits in kind or fringe benefits applied, the collective status (collective agreements, existing collective agreements) and lastly any disputes.
- The purpose of the tax review is to analyze the tax risks and points of attention to be taken into consideration in the context of the planned transaction.
- The main aim of the legal section is to provide a general understanding of the legal environment and the main risks associated with the target's commitments. Thus :
- The buyer will need to carefully analyze the contracts that are essential to the target company, as these have an influence on future strategy and earnings. The analysis will focus on specific points such as price, main conditions, termination or transfer of contracts when the target company is sold.
- Particular attention will be paid to major disputes, as well as to regular, pending or likely disputes which clearly demonstrate that certain processes of the target company are not adequate. A case in point is the recurrence of minor disputes over tenancy rights in the case of the sale of a real-estate company.
- An often highly specialized area is the analysis of the necessary authorizations or licenses that the target company must hold in order to continue its business. The laws applicable at the time a target company is acquired can change drastically in a short space of time.
- Collective agreements in the sector, non-competition clauses and the protection of intellectual property rights in employment contracts will be analyzed in particular.
- Insofar as this information is disclosed, the remuneration of top managers will also be examined.
- The buyer should make sure that the insurance covers risks based on facts that predate the sale but are only discovered after the business has been sold.
Closing the sale
Problems discovered during due diligence can be resolved as follows:
- The parties provide for Conditions precedent to be fulfilled before the transaction closes. This is possible if the problem can be solved between the signing of the contract and its closing, e.g. the agreement of a third party can be requested for the transfer of important contracts.
- Visit price reduction is the appropriate solution when problems have a direct influence on the valuation of the target company. For the seller, it is very important that the reason which led to a reduction in the purchase price is clearly identifiable, in order to prevent the buyer from asserting a warranty for the same problem.
- Provide a liability guarantee. It enables the buyer to protect himself against future charges that are not apparent in the accounts. The most common of these relate to deliveries made prior to the sale, to a previous tax adjustment or to legal proceedings concerning past events. It also protects the company's assets (inventories, buildings, etc.).
However, it is not enough to determine one or the other guarantee, it is also necessary to define precisely the way in which it will be invoked: procedure (registered mail, minimum threshold, time limit, prescription...), the seller's right to monitor disputes (joint negotiation clause) and the determination of arbitration possibilities in the event of recourse. In addition, other precautions should also be included in the warranty contract: limiting the warranty to the sale price, triggering the warranty above a certain threshold to avoid minor disputes.
About Moore Senegal
Moore Sénégal, experienced in carrying out due diligence assignments for both large companies and SMEs, brings you its expertise and know-how to create additional value for your investment project.
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