Due Diligence - Every business acquisition must be thoroughly examined

In recent years, a massive process of concentration has taken place in the domestic economy, which was not least characterized by spectacular acquisitions (e.g. Siemens-VA Tech, T-Mobile and Telering, etc.). However, not only large companies but also SMEs are increasingly involved in corporate acquisitions. However, the acquirer should not rely solely on his experience and "gut feeling" but should carefully examine a business acquisition. Such an examination is referred to as "due diligence" (literally translated as "due diligence"). In the process, a potential buyer examines the balance sheets of the target company, examines legal obstacles and assesses, above all, the economic development potential of a company (target company).

In detail, due diligence consists of several steps. Sub-areas:

:: Legal Due Diligence: Examination of the legal and contractual conditions of the company, as well as the optimization of contract drafting by lawyers.

:: Tax Due Diligence: Examination of the tax situation and identification of potential tax risks (e.g. upcoming tax audits) by business trustees. Furthermore, the optimal tax structuring of the transaction process also takes center stage.

:: Financial Due Diligence: Review of the annual financial statements (for the last two to three years) with regard to risks resulting from overvaluing assets and undervaluing liabilities. In addition, silent reserves that play a role in determining the purchase price are also identified. The financial due diligence is also conducted by the financial advisor. This also includes examining the plausibility and consistency of the business plan and critically examining the economic development potential.

:: Human Resource Due Diligence: This part includes the analysis of the personnel structure, the qualifications of the employees, as well as the labor and social-legal framework conditions.

:: IT Due Diligence: The examination of the IT system (security, IT costs, contracts, etc.) is also gaining increasing importance and should definitely be carried out by experienced IT professionals.

:: Commercial Due Diligence: In this process, the company’s strategic positioning is examined, sales, price and market share information are compared with the industry average, and the attractiveness of the products produced is assessed. A commercial due diligence can, for example, be carried out by market research institutes, but often also by the acquirer himself (who knows the industry very well).

:: Technical Due Diligence: Technical experts assess the company’s technical expertise in this process. This is particularly important when the company’s value is based primarily on patents or production processes.

In smaller companies, individual audit areas often have different importance. It is therefore not always necessary to examine all the listed areas in detail as part of a due diligence process. However, it should never be neglected to conduct financial and tax due diligence and legal due diligence by external specialists.

Advantages of a due diligence:

• Information gathering for purchase price negotiations
• Identifying hidden opportunities and risks
• Transfer of know-how by specialists and optimization of legal and fiscal conditions for corporate acquisitions
• Strengthening the negotiating position vis-à-vis the seller

As part of a due diligence process, it should be critically evaluated if the audited company only provides outdated figures or does not provide important information at all or only provides very incomplete information to the potential buyer. The presentation of overly optimistic financial projections that are out of line with past developments should also always be critically evaluated. Often, the behavior of the seller during the due diligence process can also provide clues about the professionalism and organization of the target company.

However, despite all the advantages, the costs of due diligence cannot be underestimated. These depend primarily on the size of the company, the number of specialists employed, travel costs (for companies based abroad), and the quality of the prepared documentation. It is therefore advisable to coordinate the preparation of the required documentation with the company to be audited in advance. Your financial advisor can assist you in creating these checklists; he or she has experience in dealing with corporate acquisitions. Despite all the costs, competent support for the purchase negotiations and optimization of the transaction are nevertheless almost always worth it (even if the acquisition ultimately does not materialize).

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