Due diligence is a process involved in any large purchase to ensure that the potential rewards justify the risks involved. It is at least as important when making a commercial acquisition as it is when making a large personal purchase, perhaps even more so.
Successful mergers often follow a two-step process that consists of an initial financial checkup and follow-up planning. However, many acquiring companies neglect the latter step and concentrate fully on the former. That may be the reason why some mergers and acquisitions eventually fail.
Initial financial checkup
According to Eide Bailly, the purpose of the initial checkup is to uncover potential risks, analyze tax ramifications and get a better understand of the financial and operational questions that arise on a day-to-day basis. Armed with this in-depth data, the business owner is in a position to make an informed decision about the advisability of the acquisition or merger.
While the owner of the buying company usually assigns his or her own team members to the initial checkup, sometimes he or she hires outside advisors as well. The lender funding the acquisition may specifically request the involvement of a third party.
Some business owners think that once the initial financial checkup is over, they have done all they need to do. However, Inc. Magazine argues for the necessity of follow-up planning so that everyone knows what to expect once the acquisition is complete. In other words, it is important to anticipate questions that employees are likely to ask about company policies, benefits, etc.
Employees who do not receive reasonable, concrete answers to such questions may feel uncertain and start looking around for another job that offers more security. Follow-up planning equips the acquiring company to answer these questions quickly and thoroughly.