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Successful Mergers and Acquisitions Transactions Begin with Thorough Due Diligence Investigations

July 27, 20234 min read

Hg Due Diligence Blog and Social Media Series | Part 2

This is Part 2 of a 4-part mini-blog series.

Mergers and acquisitions (M&A) are the most common means of business expansion and exit today. Many factors inform the motivation for an M&A transaction – exiting a business after decades of ownership to retire or pursue a new entrepreneurial venture, obtaining geographically desirable market share through acquisition, optimizing the value of a subsidiary to redeploy capital into the parent enterprise and so forth. For both public and private enterprises, a satisfactory transaction for buyers and sellers begins with effective due diligence on both sides to mitigate risk and elevate market opportunity.

Attorneys and bankers focus on the facts and figures in a transaction, including disclosure schedules that are tracked and revised with every introduction of critical deal information to ensure financial records accurately reflect the value of a company aligned with the buyer’s interest in acquiring the organization at the lowest price and the seller’s interest in attaining the highest market value for company, depending on which side they represent.

But, mergers and acquisitions are not merely a dollars and cents matter confined to balance sheets and accounting records. Regardless of whether assets or securities exchange hands, buyers want to be fully informed about the company they intend to purchase while sellers want to maximize the perceived value of their company and ensure they are passing their firm – and frequently their employees – into the hands of an organization that aligns with their core values to retain organizational integrity even under new ownership and management.

How does a buyer really “know” the company being purchased – that the representations and warranties of the seller are legitimate? And how does a seller determine valuation beyond a spreadsheet and mathematical calculations of expenses, debts, investments and taxes? The answer is comprehensive due diligence investigations, whether performed by a professional investigatory organization such as Hetherington Group (Hg), or by in-house professionals following thorough and regularly updated training in conducting online or open source intelligence (OSINT) investigations (which Hg also provides).

Many factors inform the valuation of company. As mentioned, accurate financial records are of paramount importance, but so are proprietary processes, brand secrets (such as recipes and product formulations) and other intellectual property  as well as market position, reputation, real property, client contracts, information and cybersecurity/data protection systems, and associations. Information on all these elements are obtained through publicly accessible business presentations, published media interviews with C-suite or board officers, compliance filings, publicly disclosed regulatory violations, social media posts (especially researching many years back for concerning issues/employees that continue to affect the company), real estate and property tax records, among other sources.

At Hg, we empower our clients to collect, analyze and preserve critical information in the M&A due diligence process whether we directly perform investigations or whether we train attorneys, intermediaries, brokers and other advisors in conducting independent due diligence investigations. Some examples of the type of information we uncover are:

  • Analysis of historical media reporting to look for adverse information

  • History of contract breaches or litigations involving the company and its suppliers

  • Environmental, workplace safety or consumer reports related to defective/dangerous products or financial fraud

  • Regulatory violations

  • Background checks on leadership and board members to uncover affiliations with organizations that present reputational risk, especially if the senior management will be retained post-sale or via merger

  • Employment practices issues  — historical or current litigations or legal settlements with past employees, challenges to DEI (Diversity, Equity and Inclusion) policies

  • Connections to companies or individuals that may be conflicts of interest

No matter the size/value of the transaction, and regardless of whether a party is the buyer or the seller in a transaction, it is critically important to immerse in an effective due diligence process to ensure a satisfactory outcome for both parties – and sometimes even to mitigate risk by walking away from a potential transaction. In due diligence, it is impossible to predetermine what may be uncovered that elevates the attractiveness of a deal or deems the deal wholly undesirable.

If your company is contemplating a near-term merger or acquisition or even preparing for such a deal that may still be years away, or your organization provides legal or business advisory services for the M&A transactions, training in OSINT for due diligence is vital to ensure success when seats are taken at the negotiating table.

For information about Hg’s due diligence investigations or training please contact us at [email protected].

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