When making an acquisition, it is important to acquire the right business, with the right management, at the right price.
Whilst there are investment opportunities now, it is crucial for all investors to undertake the right diligence to safeguard your investments. A detailed buy-side due diligence will be able to provide a factual assessment of important areas and assumptions to be considered before moving forward with the transaction, particularly during this trying period. The following are some considerations that potential investors should incorporate in their buy-side due diligence in the current climate.
Increase focus on underlying and potential risks
1. Additional focus should be given to underlying and potential risks, particularly during the current climate where there are significant business disruptions. Consideration should be given as to whether these risks will continue in the future or if there are potential risks in the future which need to be considered.
2. Risks identified can be discussed and factored into the due diligence work plan, enabling a potential investor to identify if there are mitigating controls or factors to such risks identified.
An understanding and assessment of the potential risks would assist a potential investor determine whether to move forward with the deal, whilst protecting its interest.
Normalise the quality of earnings and balance sheet of targets
3. In addition to underlying and potential risks of the current climate being factored into the due diligence, the sustainability of free cash flows in the current climate should be considered and normalisation adjustments made to the quality of earnings of targets where necessary. This is to incorporate the risks identified, and potential lasting impact of the current climate to the business being acquired. Historical information pre-COVID-19, whilst relevant, may not be the most representative of the landscape moving forward due to changes that have either been adopted by customers and others within the supply change, or changes targets have had to adopt due to regulations.
4. A robust due-diligence of targets should include normalisation adjustments to the balance sheet of targets, adjusting for potential write-downs in carrying value of assets and considering debt and debt-like items brought upon by the current climate.
Adjustments to the purchase price, and necessary representations and warranties should be obtained for normalisation adjustments made, and potential adjustments identified to safeguard the interest of investors.
Identify potential areas for investors to value add
5. A thorough due diligence in the current environment would not only provide greater assurance on the business to be acquired, it potentially identifies weaknesses in the strategic and operational direction. This would enable the investor to determine potential areas to value-add post-acquisition as part of its integration plans. Findings here should also be incorporated into the representations and warranties sought from the vendors.
Acquisitions during this period are exciting. However, a thorough buy-side due diligence review allows for risks of a target to be identified with the necessary precautions put in place, thus enabling it to be valued appropriately, which is critical in today’s uncertain climate.
In the next instalment of our series is “Using Sell-side Due Diligence to Maximise Deal Value ”.
RSM supports SMEs with their merger and acquisition activities, from deal evaluation, financial and tax due diligence, to tax advisory services and business modelling. If you would like to learn more about how we can support you in this exciting chapter of yours, we would be more than happy to speak to you.
Partner, Corporate Advisory; Head of Transaction and Valuation Advisory
T: +65 6594 7862
Partner, Corporate Advisory
T: +65 6594 7827
Director, Corporate Advisory
T: +65 6594 7887