Due Diligence in M&A

An essential part of this process is the financial due diligence, which involves a detailed analysis of the stability of financial figures (EBITDA, profit, working capital, net financial debt position, etc.).

In addition to historical results, future growth prospects and business plans are assessed, along with customer or supplier contracts, loan agreements, lease obligations, and other financial commitments, to provide the buyer with a comprehensive view of the company’s financial health.

• Understanding profitability:
  Based on historical financial data and the business plan, the buyer gains insight into the company’s evolution and key profitability drivers.
• Risk management:
  Identifying potential risks early, such as legal complications, off-balance sheet debt, or inaccurate financial information, allows the buyer to take appropriate measures. This can include representations or warranties or specific indemnities in the share purchase agreement (SPA), thereby shifting certain responsibilities to the seller.
• Valuation accuracy:
  By filtering out non-recurring and exceptional items from financial results, the buyer can conduct a realistic valuation, which is essential for determining the transaction price and negotiating terms.

A financial due diligence investigation is usually carried out by independent, hired mergers and acquisitions specialists or specialised accountants.

Depending on the complexity of the transaction, legal and tax experts may also be involved to provide a complete picture of the financial health of the company.

Traditionally, due diligence is divided into financial, legal, tax, and commercial analyses. Recently, there is also an increasing focus on technological and sustainability risks, leading to a rise in Tech and ESG due diligence. This shift reflects the growing impact of innovation and sustainability on strategic decision-making.

• Tax due diligence: Examines the company’s tax structure and history, including corporate tax, payroll tax, VAT, transfer tax, and international tax aspects.
• Legal due diligence: Assesses legal risks that may impact the transaction, such as shareholder agreements, company bylaws, partnership contracts, and key supplier or customer agreements.
• Commercial due diligence: Analyzes the company’s market position, competition, customer base, pricing strategies, and growth potential to provide insights into its stability and future expectations.
• ESG due diligence: Evaluates the company’s sustainability and social responsibility, focusing on environmental management, social impact, and governance practices.
• Tech due diligence: Reviews technology and IT infrastructure, including cybersecurity, software quality, technological innovations, and system dependencies, to assess technological stability and innovation capacity.

The findings of a due diligence investigation are presented in a due diligence report, which may range from a comprehensive document to a concise summary highlighting key opportunities and risks.

Based on these findings, the process may result in price adjustments, additional guarantees, or amendments to the agreement.

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Due diligence is typically conducted by independent M&A specialists. Depending on the complexity of the transaction, legal and tax experts may also be involved to ensure a comprehensive assessment of the company’s financial, legal and fiscal position.

At deminor NXT, we offer in-house expertise in legal, financial and tax matters, enabling us to support investors throughout the entire M&A and due diligence process. From the initial strategic analysis to the final closing, we guide our clients every step of the way to ensure a well-informed and successful transaction. Please do not hesitate to contact us.