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Buying a company in a strategic M&A deal, is a huge investment which means you want to enter into the agreement with all of the correct information on everything from sales reports to inventory. This is where due diligence comes into play.

 What Is Due Diligence?

Due diligence is the investigation of a potential investment to confirm the worthiness of the investment before finalizing the transaction. It is essentially a thorough evaluation of the entirety of the company from top to bottom to ensure the buyer is fully informed about every aspect. This includes an in depth audit of all financial statements such as balance sheets and cash flow statements. If it sounds time consuming, it is, but who doesn’t want to know all the facts before making a big purchase? Would you buy a house without a home inspection or a used car with a maintenance record? Doing your due diligence before you sign on the dotted line is crucial to protecting your investment.

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The Due Diligence Process: Merger & Acquisition Checklist

Properly done, due diligence takes time, but it’s worth the patience to save troubles down the line. It’s not unusual for businesses to “put lipstick on the pig” to try to make a struggling operation seem to be in better shape than it really is. Of course, taking the extra time to look under the proverbial hood and scope out every nook and cranny is the best way to avoid buyer’s remorse. This commonly entails

  1. Examining all business records and documents including financial statements, spreadsheets, and existing contracts
  2. Checking sales against customer lists to make sure everything matches up and you know exactly what you’re walking into
  3. Talking to business managers, executives, employees, and others to get the behind-the-scenes scoop. Understand that leadership is likely to be disgruntled by the time you get to the sale, so be sure to speak with all levels of employees
  4. Paying special attention to discrepancies between what is reported and what is really happening

Cornerstone’s Approach: Due Diligence Checklist

Cornerstone consultants dig deeper and cover more ground in search of discrepancies to ensure you receive the whole truth and nothing but the truth. A typical assessment includes taking a fine-toothed comb to all of the following:

  • General company info
  • Company management and employees
    • Generally, human resources will try to trim as many employees as possible, so be sure you’ll be adequately staffed to meet your goals.
  • Products and services
    • Are the operating systems functional and able to sustain you? This is often not the case, so it’s important to have a comprehensive assessment of the system.
    • A capacity analysis, inventory analysis, and assessment of material flow are crucial to determining if your potential investment is sustainable.
  • Quality is often the first thing to go when a company is up for sale; you’ll want to know this is not compromised before signing on the dotted line.
  • Legal matters
  • Marketing and competition info

At the end of the day, this is your investment, and you want it to be a windfall instead of a lemon. To meet your goals, you need to make your due diligence procedures as comprehensive as possible. Cornerstone Consulting Organization can help you ensure your investment is sound and provide you a clear picture of what you’re getting into.

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CCO cannot and does not provide legal advice. It’s important to consult with qualified counsel before adopting any new policies. It’s also your responsibility to determine whether legal review of work product is necessary prior to implementation.