An acquisition is a corporate transaction where a company purchases most or all of the other company’s shares to gain control over the acquiring company. The acquisition is a good strategic move if proper planning and analysis are done.
The acquisition is a big-budget process than starting from scratch. Even though the acquisition is costly, there are many benefits like getting financial assistance, acquiring valuable legal rights, accessing a wider customer base, obtaining human resources, etc. The following is the summary of due diligence factors that are to be considered by the acquiring company before taking over the target company:
- Financial matters: A proper analysis is to be done regarding the historical financial results & metrics as well as the reasonableness of the future projections. Also, the financial aspects like capital requirements, current capital commitments, indebtedness, aging of accounts receivables, etc. to be thoroughly verified.
- Cost of running the target company: A study should be done regarding the cost required for running the business, and its impact on the cash flow of the acquiring company to be done.
- Value creation: It should be analyzed whether the acquisition adds any value to the existing business company by combining the target company.
- Price of acquisition: An independent assessment or business evaluation to be carried out to establish the worth of the business of the target company. Factors like client retention, recurring revenues, etc have a significant influence on the business evaluation. All relevant factors must be considered to arrive at a reasonable price.
- Customer base: The acquiring company should fully understand the target company’s customer base including the level of concentration of the largest customers as well as the sales pipeline. A focus should be given to customer relationships, and warranty issues if any.
- Marketability & reach: The impact on the extension of the brand message through the acquisition could be traced so that the benefit of any that emerges out of the decision can be analyzed.
- Litigation: An overview of any litigation, arbitration, or regulatory proceedings involving the target company is to be undertaken.
- Employee/Management issues: The matters like labor disputes, a summary of employee benefits, incentive/bonus plans, plans relating to severance pay, actuarial reports or past years, etc. to be analyzed.
- Related party transactions: The extent of related party transactions, the relevant agreements, and their impact on the financial results are to be verified.
- Integration and managing the change: The acquisition would become a success only if there is effective integration and management of change. There may be resistance to change or towards the new owner from the existing target company. Hence proper communication should be maintained to overcome such challenges.
The acquisition would become a great success if a due diligence analysis is carried out before taking the decision.
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