Due Diligence in Business Transactions (Corporate Finance)

Originally the term was limited to public offerings of equity investments, but over time it has come to be associated with investigations of private mergers and acquisitions as well. The term has slowly been adapted for use in other situations

Due diligence is used to investigate and evaluate a business opportunity. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant aspects of the past, present, and predictable future of the business of a target company. . “The examination of a potential target for merger, acquisition, privatisation or similar corporate finance transaction normally by a buyer, a reasonable investigation focusing on material future matters, an examination being achieved by asking certain key questions, including, do we buy, how do we structure the acquisition and how much do we pay, an examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis” is what due Diligence needs to find out.

Due diligence sounds impressive but ultimately, it translates into basic commonsense success factors such as “thinking things through” and “doing your homework”. So you have decided to purchase an existing business. Regardless of whether the deal is structured as an asset transaction, a stock transaction or a merger, make sure you know what you are getting into by requiring detailed information from the seller regarding its business operations and finances and this is where MULUH & PARTNERS sets in.
The Due Diligence process (framework) can be divided into nine distinct areas.

  • Compatibility audit.
  • Financial audit.
  • Macro-environment audit.
  • Legal/environmental audit.
  • Marketing audit.
  • Production audit.
  • Management audit.
  • Information systems audit
  • Reconciliation audit.

It is essential that the concepts of valuations (shareholder value analysis) be linked into a due diligence process. This is in order to reduce the number of failed mergers and acquisitions.
In this regard two new audit areas have been incorporated into the Due Diligence framework:
the Compatibility Audit which deals with the strategic components of the transaction and in particular the need to add shareholder value and the Reconciliation audit, which links/consolidates other audit areas together via a formal valuation in order to test whether shareholder value will be added.

In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labour matters, immigration, and international transactions.

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