Acquiring a business is complex. The process is often inevitably lengthy, requiring extensive time for commercial research, in addition to thorough financial and legal due diligence. However, when done improperly, errors in due diligence can be costly, both financially and reputationally.

In this guide, we’ll walk you through some of the key steps involved in an acquisition.

In short, due diligence is the process of verifying the facts and becoming aware of any risk involved in a transaction.

In the context of an acquisition — where enormous amounts of capital changes hands — due diligence is done in forensic detail. After all, the larger the deal, the greater the risk. One only needs to look at either the TimeWarner & AOL acquisition or Hewlett Packard’s acquisition of Autonomy to see how poor due diligence can result in billions of pounds worth of losses.

It’s therefore important not to rush this process — rushing in order to complete a deal faster can result in a litany of errors. These include gaps in financial analyses, an incomplete understanding of compliance in the company’s jurisdiction, and failing to gain a full understanding of the business’s commercial viability.

It might sound obvious, but without investigating further, you won’t know what you’re missing.

• Financial due diligence
• Legal & compliance due diligence
• Commercial due diligence
• Operational due diligence
• IT and cybersecurity due diligence

Due to the complexity of mergers and acquisitions, there are always a number of parties involved in the process. This includes accounts (both internal and external), corporate finance, lawyers, and dedicated M&A consultants.

Having a company database could also help with this process. This varies from simple company checks to make sure the company exists, through to more detailed cash flow analysis and patent information.

Investing in private companies can be more complex than in public companies — especially when it comes to due diligence. This is because private companies are not obligated to publicly disclose as much corporate information as a publicly listed company. Amongst other things, it can make valuations particularly tricky to settle on.

There is therefore a lot more research involved in a private company acquisition. One of the key challenges is gaining access to reliable data. Lack of access to this information can have a material impact on the buyer’s decision-making, so it’s important to get it right.

This requires close collaboration with the acquiree’s due diligence team. And, invariably, there is a lot of back-and-forth communication between both organisations — plus any advisors and lawyers — to establish the facts.

The timescale from making an offer to completing a deal can vary. According to legal firm Harper James, the process is estimated to take anywhere between a few weeks to several months.

Due diligence forms a significant part of this time for a number of reasons. Firstly, as we’ve discussed, it takes time for all parties to gather and pool all the relevant information. Depending on the evidence produced, due diligence may lead to renegotiations over company value or other terms, which can slow down the acquisition process.

You’ll need to begin with high-level research and initial screening. This will help you decide whether or not to engage with a business, and to help identify any potential red flags early on.

For example, a firm considering the acquisition of a tech startup can use Beauhurst to examine the company’s funding history, its market competition, and whether it has a dependency on a single investor – just to name a small handful of uses.

You can find this information using a combination of Companies House, the company’s own website, LinkedIn, and other forms of research available to you.

Once you’ve screened a potential acquisition target, you can examine the company’s financials, regulatory compliance, and intellectual property information with greater scrutiny.

Using this information you can verify the company’s sources of R&D funding and patent ownership, ensuring intellectual property assets are both legitimate and protected. It also ensures that the company you’re proposing to purchase can legally operate in that industry.

Next, you can collate any risk factors found in the previous steps and raise them with the company’s due diligence team. Settling these risks now will make the broader process run more smoothly.

Finally, consolidate all your findings into a due diligence report. This will help your firm make an evidence-based decision whether the acquisition is viable.

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