The merger and acquisition (M&A) market is heating up. After a period of restraint during the recent economic downturn, transaction activity is again on the rise.
According to Tom Powers, CPA, director of assurance and business advisory services at GBQ Partners LLC, total transaction volume through the third quarter has surpassed total transaction volume in 2009.
If your company is thinking about undertaking a merger or acquisition, now’s a good time to research the current trends in due diligence and make sure you’re prepared for a smooth transition process.
“You need to make sure you’re paying the right value for what you’re buying,” says Powers. “Are you getting what you think you’re getting? Are you buying what you think you’re buying? Understand the risks and opportunities and make sure they’re consistent with your expectations.”
Smart Business spoke with Powers about due diligence and how to make it a key component of your M&A transactions.
What key things do you need to understand about due diligence?
There are different areas that need to be taken into consideration, such as financial facts, operations and human resources. Sometimes some of the other non financial areas could be more critical, because they might truly be the value of the company. You have to look at customers and employees and assess whether they will remain after the purchase.
The leverage has shifted to a buyer’s market. Before, in a seller’s market, the seller had more leverage and required a fast process or had multiple bidders. Now you might have one bidder and four sellers. People take more time, are more cautious and try to obtain more certainty before they finalize a deal — it doesn’t have to be a rush.
What types of due diligence need to be performed during an M&A transaction?
It should be more of a risk-based approach. Understand the mechanics of the arrangements you’re getting into. It’s always better to do a risk-based approach versus wall-to-wall due diligence. Work through a checklist of where your uncertainties might be. Consider the historical performance of the company, the projected performance, the balance sheet, the strengths and weaknesses and tax. If it’s a stock deal, it might come with potential tax liabilities and you need to understand the tax risks. You also need to look at the commercial side, including competition, marketing, human resources and operations.
