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Beyond the Financial Due Diligence

We find that when a merger & acquisition deal fails it is usually due to over-valuation, over-payment and over-leverage. An independent review should allow both sides, especially the buyers, to perform thorough analysis and due diligence. Such a review gives greater transparency during the transaction to better inform buyers about their business deal.

Senior management within companies know that some transactions don't make good business sense, but in their rush to move forward, they often overly focus on the completion of deals and forget about due diligence. But an oversight like this can lead to financial disaster. Due diligence, when done right, can differentiate companies for which an investment makes sense, from those where it does not..

Performing thorough due diligence helps both buyers and sellers identify weaknesses and gaps that can be remedied or explained, and that can be exploited for negotiating leverage. In other words, due diligence allows the buyer to find out everything that it needs to know before making an investment decision. This allows the buyer to either withdraw from the deal or adjust the deal’s valuation and have any uncovered problems remedied before the deal goes ahead.

In a broader sense, due diligence is an important risk management tool, perhaps the most important of all, which explains why it is a critical process for companies about to make a transaction. A thorough due diligence process helps analyse and establish the difference between a good and bad deal. It also evaluates inherent risks and opportunities and puts all the facts on the table.

Traditionally, when companies consider the due diligence process, they think of financial due diligence; i.e. a critical financial review performed by accounting firms of the company’s financial statements, books and records, to determine whether the company is financially viable and the price being paid is reasonable.

Although financial due diligence is critical, the due diligence process is still incomplete if that is the only aspect of the company to be checked. Buyers can employ good financial controllers to enhance internal control and financial reporting systems, as companies can’t grow without being operationally sound. Operations and “qualitative” due diligence (i.e. intangible factors such as business strategy, culture, risk profile, and company management) are all checked out thoroughly before we advise our clients to go ahead. Of course, this does not lessen the importance of financial due diligence, but merely demonstrates that in today's hyper-competitive world, buyers need to be careful in their assessments and consider all the tangible and intangible factors of a company. To go beyond financial due diligence is especially critical when the buyer and the seller are from different countries and cultures. The operational processes and the common view of what is “best practice” might not be evaluated in the same way – something that increases the risk of failed transactions because of a lack of mutual understanding.

Content provided by Grant Thornton Hong Kong Limited
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