Understanding all aspects of financial due diligence is essential for a potential buyer in any deal. Understanding all of the relevant issues will help you navigate through your transaction and avoid any unexpected pitfalls.
While the financial position and results of a target company are vital to the success of any deal, the following four areas are the most common and critical due diligence areas to perform during the deal process:
Taxes
Analysis and review of the multiple types of taxes imposed by various taxing jurisdictions on a target is crucial to understanding the target’s post-transaction after-tax cash flow as well as to identify and quantify any potential tax obligations that the buyer may inherit as a result of the transaction.
Tax due diligence commonly includes (but is not limited to) a review of income/franchise (both federal and state), sales and use, payroll, employment, and property taxes.
This diligence helps the buyer understand the tax responsibilities of the target and ensures that the target is in compliance with all tax-related matters. Failing to perform such diligence may result in the buyer acquiring unwanted and/or unforeseen tax-related liabilities.
Information Technology
Information Technology (IT) diligence includes reviewing, analyzing, and evaluating the target’s IT function. This engagement may involve an extensive examination of the target’s technological architecture, processes, products, and assets. IT diligence allows the buyer to gain comfort with the target’s current IT capabilities, the complexity of its IT architecture, and sustainability of its IT assets.
Absent an understanding of a target’s IT department and infrastructure, the buyer may find itself needing to make meaningful and unexpected capital expenditures after the transaction.
Insurance
Insurance diligence assists in identifying the target’s current insurance policies, current premiums discounts, historical losses, existing liabilities or undisclosed liabilities, potential exposures, and the transferability of these policies post-transaction.
Buyers often overlook insurance diligence and an analysis of insurance-related matters during a proposed transaction. However, not doing the work necessary to understand the current state of the target’s insurance programs can lead to unexpected post-transaction risk and exposure.
Legal
The buyer should engage legal counsel to assess the legal risks associated with a potential acquisition. Review of all corporate and legal documentation allows the buyer and its legal counsel to identify any potential legal problems arising from the transaction (or that the buyer may inherit from the target). Absent legal diligence, the closing of a deal can be delayed or even terminated.
LGT assists clients in a wide variety of diligence capacities. Whether it’s performing financial or tax diligence or you need help finding a qualified attorney or other specialist, LGT has the resources to ensure that you can navigate smoothly through your deal to closing.
Do you have questions about certain due diligence types or other transaction advisory-related matters? Please contact Jon in our SALT department.