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.
Une due diligence, n’est pas un exercice vain. Elle sert à combler le déficit d’information d’un potentiel acheteur sur la qualité d’un actif par rapport au vendeur. Le vendeur connaît en effet son entreprise de l’intérieur alors que l’acheteur n’a accès qu’aux informations publiques la concernant. Il y a donc autant de due diligence que de transactions et chacune pose toute une série de 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 :
- L’acheteur devra analyser minutieusement les contrats qui sont essentiels pour la société cible car ceux- ci ont une influence sur la stratégie et les gains futurs. L’analyse se concentrera sur des points particuliers comme le prix, les principales conditions, la résiliation ou encore le transfert des contrats lors de la vente de la société cible.
- Les gros litiges feront l’objet d’une attention toute particulière, tout comme les litiges réguliers, pendants ou probables qui démontrent à l’évidence que certains processus de la société cible ne sont pas adéquats. Il s’agit, par exemple, de la répétition de petits litiges du droit de bail dans le cas de la vente d’une société immobilière.
- Un domaine souvent très spécialisé est l’analyse des autorisations ou licences nécessaires que la société cible doit détenir pour continuer son activité. Les lois applicables au moment de l’acquisition d’une société cible peuvent drastiquement changer en peu de temps.
- 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.
- L’acheteur devra s’assurer du fait que les assurances couvrent bien les risques basés sur des faits antérieurs à la vente mais qui ne sont découverts qu’après la vente du business.
Closing the sale
Problems discovered during due diligence can be resolved as follows:
- The parties provide for Conditions precedent devant être remplies avant le closing de la transaction. Ceci est possible si le problème peut être réglé entre la signature du contrat et son closing, par exemple l’accord d’une partie tierce peut être demandé pour le transfert de contrats importants.
- Visit price reduction est la solution appropriée lorsque les problèmes ont une influence directe sur l’évaluation de la société cible. Pour le vendeur il est très important que la raison qui a amené à une réduction du prix d’achat soit clairement identifiable afin d’empêcher l’acheteur de faire valoir une garantie pour ce même problème.
- 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.).
Toutefois, il ne suffit pas de déterminer l’une ou l’autre garantie, encore faut-il définir précisément la manière dont celle-ci sera mise en jeu: procédure (courrier recommandé, seuil minimum, délai, prescription…), droit de regard du cédant sur les litiges (clause de négociation commune) et la détermination des possibilités d’arbitrage en cas de recours. Hormis cela, d’autres précautions sont également à mentionner dans le contrat de garantie: limitation de la garantie au prix de vente, mise en jeu de la garantie à partir d’un certain seuil afin d’éviter les petits litiges.
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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