Wise consumers never buy anything expensive before a careful product examination. It’s the same for companies that wish to buy another company or, in this case, merge with them. Financial due diligence services are requested when investors want to understand everything about their target, which means examining its financial life inside out, but not only so.

It’s not a job for amateurs, as there’s too much money and far too many variables involved. That’s when investors and managers look for a due diligence process by AcquinoxAdvisors. Here’s what both ends of the deal need to know about this process.

Defining the Concept

Due diligence is one of the first steps companies and investors take before making big decisions, such as mergers and acquisitions. It involves deeply examining financial records, operational efficiency, IT structure, data safety, and how a company has dealt with its legal obligations. Typically, both parts of the deal resort to financial due diligence services at that point. There are primarily four types, as explained below.

Legal

As the name suggests, legal due diligence (LDD) focuses on all legal aspects regarding a target company. In this case, intellectual property rights, employment agreements, contracts with suppliers and other business partners, post-tax profit, income, and the company’s legal structure.

Financial

Arguably the most common type in the business, the best financial due diligence services are always in high demand. Here, all aspects of a business’s financial health are considered. Income and cash flow statements and balance sheets are thoroughly examined by experienced professionals and digital tools to develop not only financial projections but also to factor assets and liabilities.

IT

Some due diligence service providers also provide IT examinations to see how a target investment handles its data, networks, hardware, software, and cybersecurity. The company’s IT strategy is also analyzed for potential risks or opportunities.

Operational

Operational diligence checks how efficiently the company handles its daily operations. It also assesses the quality of its products and services, comparing them with competitors. Operational aspects also include the company’s growth strategies and the models it has been using to achieve such goals.

Legal Due Diligence 101

LDD involves more details than the human brain can memorize. Worse still, it can be lengthy and chaotic if both parties don’t prepare beforehand. Having all the papers in place is crucial for a smooth and streamlined LDD process.

In general, the process involves reuniting copies of all agreements signed by the company, which may affect its assets. In the first stage, LDD also checks compliance programs, policies, and related documents, as well as if the company is restricted in any state or country. Material assets, including inventory stock, real estate, and equipment, are also considered.

Here’s a summarization of its main aspects.

Ownership

Investors need to know how the target company is navigating the stock market. It involves providing information about all shareholders and their stake in the company. Stock broker contracts and transfer records are also vital at this point. Companies must also prove that the outstanding stock has been completely paid.

Products and Services

It’s up to the target company to provide details about all of its products and services. More importantly, it needs to provide evidence that it’s compliant with the regulations of its industry, be it the FDA, FLSA, or others. LDD services will also look into product warranties, recalls, material warranty claims, and potential liabilities.

Human Resources

Here’s where the target company must disclose its workforce, listing all employees and reviewing interview guides, job applications, and hiring protocols. Often, legal due diligence firms also request reports on issues like disability legislation and accusations or charges of sexual harassment in the past few years. LDD specialists will also want to see disciplinary procedures and involuntary termination protocols in place. US-based companies must be compliant with the Fair Labor Standards Act.

Litigations

Investors have the right to know whether their target is involved in a legal battle. Companies must summarize all litigations in the past five years, including arbitration proceedings, decrees, or statutory orders that may affect the business. It’s also important to mention any closed government investigation in recent years.

Obligations

Target companies must provide copies of service, vendor, and customer contracts, as well as franchise agreements, joint ventures, and partnerships. Retirement agreements, building improvement contracts with constructors, and any existing contract for leasing or purchasing real estate or machinery are also part of the bulk documents.

Licenses and Intellectual Property

Failure to provide valid licenses is a deal breaker for investors. They need to know everything regarding licensing: franchise agreements, royalties, sublicenses, and, of course, government permits and authorizations. It must also be clear whether such licenses need to be renewed regularly and what costs are involved in the process.

The same goes for intellectual property issues. Copyrights, trademarks, service marks, patents, and material trade secrets must be on the table. Additionally, companies must provide a list of the creators of each component involving intellectual property.

Conclusion

Including all aspects of LDD in a single article would not be possible. Yet, the details summarized here already give a fair picture of its complexity. The process involves a wide array of documents, and target companies must have them all at hand if they want to be perceived as reliable, efficient, and promising.

FAQ

What is legal due diligence (LDD)? Why is it important for M&A?

Legal due diligence maps a company’s legal structure, from employment agreements to intellectual property rights. It’s crucial for mergers and acquisitions because it can tell whether the company is keeping with its legal obligations. It’s a safety measure that can’t prevent investors from inheriting legal problems that weren’t on the table at the time of negotiation.

What are the main aspects analyzed in LDD?

Legal due diligence reviews all company contracts with employees, suppliers, business partners, and financial statements.

Why choose Acquinox Advisors for financial due diligence services?

Acquinox Advisors blends industry expertise with the most advanced digital technologies to provide bespoke financial due diligence services. Visit Acquinoxadvisors.com and learn more about our services and successful stories.

This article was written by FM Contributors at www.financemagnates.com.Thought LeadershipRead More

You might also be interested in reading It’s a go! Uniswap Foundation becomes reality after 86M votes in favor.