In the complex world of mergers and acquisitions (M&A), the process of purchasing a company is fraught with numerous challenges and risks. One of the most critical aspects of this process is the valuation of the target company.
Accurate valuation is essential for making informed investment decisions, and it requires a comprehensive understanding of the company’s financial health, operational efficiency, and market position. Due diligence engagements performed by an independent practitioner play a pivotal role in ensuring the accuracy and reliability of this valuation.
Why due diligence?
Due diligence is the process of verification, investigation, or audit of a potential deal or investment opportunity. It aims to confirm all relevant facts and financial information and to verify any other aspects highlighted during a merger and acquisition (M&A) deal or investment process. Due diligence is completed before a deal closes to provide the buyer with assurance about their purchase.
Due diligence significantly increases the chances of a successful transaction. It contributes to informed decision-making by enhancing the quality of information available to decision-makers. This process allows you to feel confident that your expectations regarding the transaction are accurate.
A comprehensive due diligence process is thus beneficial for a number of reasons:
- Confirmation and Verification: due diligence is conducted to confirm and verify the information presented during the deal or investment process. This step ensures that all claims, financial data, and operational details are accurate and reliable.
- Identification of Defects: through due diligence, potential defects or issues within the deal or investment opportunity are identified. This helps in avoiding bad business transactions by bringing hidden liabilities, operational problems, or potentially significant risks to light.
- Valuation Information: due diligence provides critical information that is useful in valuing the deal. By examining financial statements, business operations, market conditions, and other relevant factors, a more accurate and comprehensive valuation can be achieved.
- Compliance: ensuring that the deal or investment opportunity complies with the required investment or deal criteria is another important reason for due diligence. This includes legal compliance, regulatory adherence, and meeting the strategic objectives of the parties involved.
Why use an independent practitioner to conduct the due diligence process?
The question then beckons; can’t I conduct my own due diligence?
In theory; yes! However, there are a number of key considerations as to why an independent practitioner should always be utilised as part of the due diligence process:
- Verification of assumptions and projections: valuations often rely on certain assumptions and projections about the future performance of the target company. Independent practitioners critically assess these assumptions to determine their reasonableness and validity through stress-testing projections and comparing them to industry benchmarks.
- Enhancing credibility and confidence: A valuation supported by thorough due diligence from an independent practitioner carries greater credibility. It provides confidence to both buyers and sellers, facilitating smoother negotiations and fostering trust between the parties.
- Legal and regulatory compliance: independent practitioners ensure that the due diligence process complies with these regulations, mitigating the risk of legal complications post-transaction. They also help in identifying any compliance issues within the target company, such as pending litigation, regulatory violations, or environmental liabilities, which could have significant financial implications if overlooked in the absence of the required representations from the relevant parties.
The bottom line?
In the high-stakes world of M&A, the importance of independent due diligence cannot be overstated, as it significantly contributes to the success and sustainability of the acquisition. Due diligence engagements performed by independent practitioners are indispensable in the business valuation process for purchasing a target company providing objective, comprehensive, and detailed assessment of the target company’s financial health, operational efficiency, and market risks.
Accru’s offers services regarding due diligence engagements as well as a range of other audit and assurance services for a huge diversity of organisations. If you’d like to know more about how we could add value through an audit, please get in touch with your local Accru office.
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