What Other Types of Diligence are Essential to a Deal?

Over the course of 2019, Marcum’s Transaction Services Group has authored a series of blogs to help potential buyers and sellers understand how financial due diligence can provide value in the deal process. We provided an in-depth look at certain financial due diligence issues, including:

• Common normalizing adjustments;
• Revenue recognition;
• Analysis of the target’s operations, customers and vendors;
• Balance sheet review and validating the financial position of a target;
• Normalizing monthly net working capital

Understanding these topics can help you more effectively navigate your transaction and avoid the bumps in the road.

Although often vital to the success of a deal, diligence surrounding a deal does not stop at the financial position and results of a target. A buyer should consider a wide array of other potential deal issues to ensure that the proper level of diligence is completed. Some of the most common diligence engagements performed by buyers and their advisors during the deal process may include:

• Taxes – Analysis and review of the many different types of taxes that may be imposed by various taxing jurisdictions on a target is crucial to understanding not only the post-transaction after tax cash flow of the target, but also any potential tax obligations that may flow to the buyer as a result of the transaction. Tax due diligence commonly includes a review of income (Federal, state and local), sales and use, payroll, employment and property taxes, among others. This assists the buyer in understanding the tax landscape of the target and ensures that the target is in compliance with all tax-related matters. If a buyer fails to check all the tax-related boxes, they may find themselves subject to unwanted and/or unforeseen tax related liabilities.
• Information Technology – This diligence includes reviewing, analyzing and evaluating the information technology (IT) function of a potential target. This engagement may involve an extensive examination of the target’s technological architecture, processes, products and assets. IT diligence allows the buyer to gain comfort with the target’s current IT capabilities, the complexity of its IT architecture and sustainability of its IT assets. Without a clear understanding of a target’s IT department and infrastructure, the buyer may need to make meaningful and unexpected capital expenditures post-transaction.
• Insurance – Insurance diligence assists in identifying the target’s current insurance policies and whom the policies fall under, current premiums discounts, historical losses, existing liabilities or undisclosed liabilities, potential exposures and the transferability of these policies post-transaction. Too often, buyers overlook insurance diligence and analysis of insurance-related matters during a proposed transaction. It is important for the buyer to fully understand the current state of the target’s insurance programs. Not doing so can lead to unwanted risk and exposure post-transaction.
• Legal – In order for a buyer to better understand the target, the buyer may engage legal counsel to assess the legal risks associated with a potential acquisition. Review of all corporate and legal documentation allows the buyer and its legal counsel to identify any potential legal problems that could result from the proposed transaction (or that the buyer may inherit from the seller as a result of the transaction). If this is not properly completed, the closing of a deal can be delayed, or worse, terminated.

Marcum’s Transaction Services Group assists clients in a wide variety of diligence capacities. Whether it’s performing financial or tax diligence or you need help finding a qualified attorney or other specialist, Marcum has the resources to ensure that you can navigate smoothly through your deal to closing.

Do you have questions about certain due diligence types or other transaction advisory-related matters? Please contact Patrick Walsh, CPA, CM&AA, MBA, at 440.459.5854 or [email protected].