The due diligence process is essentially a process to test assumptions and hypotheses made during the planning stage to increase the overall knowledge of the target, its value, business risks and opportunities, as well as develop plans for its integration. The due diligence process typically covers:
- Testing and refining estimates made in the initial valuation:
- A standalone assessment of the target
- Value implications of new initiatives and opportunities not reflected in current financial performance
- Separate value assessment of potential synergies, with risks/interdependencies/pay off assessments and risk adjusted discount rates
- Separate value assessment of potential strategic benefits, again using risk adjusted discount rates
- Financial due diligence
- Review of historical financial performance, including accounting policies, pro forma financial information and non-core or discontinued operations
- Review of quality of assets
- Review of cashflow and working capital
- Assessment of budgetary and forecasting systems
- Review of audit processes
- Assessment of Management Information Systems
- Development of plans for the potential redefining of systems and processes for the Group and its retained businesses (post the sale)
- Completion process, including closing accounts and audit
- Taxation due diligence
- Legal/compliance due diligence
- Material contracts
- Litigation
- Compliance
- Regulatory
- Human resources due diligence
- Commercial/Operational due diligence
- IT due diligence
- More detailed plans for integration, including straw man approach
- Plans to manage ongoing potential warranty and indemnity claims
Where a target business is being separated from a Group, the following additional steps may be covered as relevant:
Assessment of separation implications, including:
- Ownership of assets
- Staff transfer
- Taxation
- Transition service arrangements
- Ongoing service and other agreements (leasing of premises, ongoing customer/supplier relationships between buyer and seller)