Due diligence is an essential part of an M&A transaction for both buyers and sellers. In this article, we will discuss the main aspects in preparation this procedure and the role of virtual data room technology in this process.
The role of due diligence in M&A deals
Any M&A agreement, including in the agricultural sector, has a complex structure, requires prior planning and coordination of its stages, a comprehensive approach to implementation. Detailed preliminary study of the object of the agreement plays an important role in the implementation of M&A projects.
Regardless of who initiated the M&A agreement – the seller or the buyer – the operational goals and motivations of the parties for obvious reasons are opposed. Economic benefits, as the result of the transaction, encourage the seller to conduct pre-sales training, during which at best measures are taken to resolve problematic issues of the enterprise, but often it comes down to cosmetic completion of missing documents on significant indicators, masking existing shortcomings.
The importance of due diligence of the object of the acquisition is fully explained by the need to confirm or refute the declared by the seller indicators of the object of the transaction, to identify hidden defects and risks. The conclusions and results of the study can radically change the previous agreements of the parties, the structure of the future agreement, and in some cases – even question the feasibility of its implementation as a whole.
Key aspects of due diligence for M&A transactions
Due diligence is the analysis and examination of a company, primarily in the context of company sales and purchases. It serves to examine the legal, tax, financial and competitive conditions of the company, as well as to confirm a company’s value and ultimately a realistic purchase price. Buyers want to identify risks that can be used as an argument for reducing a purchase price and outsourced to the seller as part of the drafting of a purchase contract.
Carrying out a due diligence check is not only time-consuming for the buyer, but also ties up considerable work capacity for the seller. The M&A due diligence includes 5 key points:
- compilation of the documents/establishment of the virtual data room by the seller;
- disclosure of information/evaluation of documents by buyers;
- submission of questions and document requests by buyers;
- answering questions/supplementing documents;
- creation of due diligence reports by audit teams.
Finally, all findings from the individual audits are summarized in the due diligence report. In the area of M&A activities, the report serves to summarize the results of the examination of the project in question and then serves as a basis for decision-making.
Virtual data room – secure digital workspace for M&A due diligence
Depending on how complex the corporate structures of the potential new customer or existing customer are, the research work can be very time-consuming and complex. In any case, a group of specialists involved in conducting a comprehensive study of the company’s activities should work out significant volumes of documentation and information provided by the seller’s representatives, and check the results from alternative sources. Thus, the creation of planning documents, an inspection of agreements is set up in a restricted-access electronic data room.
Virtual data room is a secure collaborative platform for file-sharing between contractors, that provides transparency into business operations. A table of contents (“data room index”) is created for the entire inventory of documents, which makes it easier for prospective buyers to orient themselves during the check.