Commercial Due Diligence for Buying and Selling Companies

1 Day In-House Training Course

Due diligence can never eliminate risk but, methodically undertaken, it will reduce the level of surprise post acquisition. This course explains the objectives and procedures of a thorough due diligence investigation relating to the acquisition of companies and businesses.

This course is also available on video
15 videos (5 hours and 14 minutes)

This 1-day, in-house, training course provides practical advice on the fundamental principles, techniques and procedures of a due diligence exercise and on the different objectives in the due diligence process, covering commercial, financial and legal due diligence and also the more specialised areas of investigation.

The roles and obligations of the financial advisers, reporting accountants and solicitors involved in a due diligence investigation are separately examined with emphasis on examples of problems that might arise as a result of inadequacies in the extent of the due diligence process.

Course Outline

  • Prepare for Success

    • Overall Objective – assess the nature of the transaction
    • When Should Due Diligence Start and End? – a continuous process
    • When, Why, How and Where is Due Diligence Applied? – each case is uniquely different
    • Preserve Shareholder Value – most acquisitions destroy shareholder value
    • Assess Material and Probable Risk – residual risk will remain but surprise can be reduced
    • Interaction between Due Diligence and Warranties – establish a reasonable balance
    • The Core Due Diligence Team – financial advisers, reporting accountants and solicitors
    • Focus on important issues – material and probable risk
  • The Purpose of Commercial Due Diligence

    • What is Commercial Due Diligence? – kick the tyres, count the beans, look for skeletons
    • Evaluate the Opportunity – is it worth the effort?
    • Investigate Three Specific Risk Areas – sector, competition, management
    • Look Below the Radar – customers, suppliers, competitors, employees
    • What is the Industry Structure? – competitive activity, barriers to entry
    • Analyse Commercial Risks – operating cycle, routine and non-routine threats
    • Test the Forecast – supply chain analysis, industry life cycle, economic cycle
    • Sensitivity Analysis – what could go wrong and what might go right?
  • The Result Legal Due Diligence

    • Insist on Senior Legal Input – intelligent questions reveal unsatisfactory answers
    • Financial and Commercial Operations – the nature of the business, its assets and liabilities
    • Transitional Support – is it required post acquisition?
    • Litigation Analysis – assess the present position and look for clouds on the horizon
    • Compliance Review – does the target operate within the law?
    • Personnel and Employment – is it likely that anyone will cause problems?
    • General Housekeeping – no company is perfect: suggested improvements
  • The Objective of Financial Due Diligence

    • Plan the Work – financial due diligence is not an audit
    • Project the Maintainable Profits to Assess Value – growth rate, risk profile, multiples
    • Investigate Assets and Liabilities – are the assumptions of commercial due diligence true?
    • Check the Adequacy of Working Capital – has it been depleted prior to sale?
    • Investigate Capex and Depreciation – review the asset replenishment cycle
    • Examine Budget Procedures – test the track record
    • Assess the Internal Controls – how are risks identified, analysed and monitored?
    • Analyse Cash/Revenue Movements – reconcile profits to cash
    • Identify Indicators of Potential Fraud – management, accounts, industry
    • Structure the Content of the Due Diligence Report – match it to the client’s requirements
  • Further Investigations

    • Environmental Due Diligence – avoid inheriting unlimited liabilities
    • IPR and Technology Due Diligence – a frequent last minute deal breaker

Course Notes, Slides and Exercises

Participants will receive a booklet containing copies of 15 slides and 56 pages of very comprehensive notes. Each slide will cover a number of related topics and the accompanying notes will support the content of the course to be delivered by the trainer.

During the course of the day, participants will undertake one or two exercises (problems) in groups of two or three (depending on the size of the class) which will involve considering what advice should be given to a client in particular circumstances. Participants will discuss the exercise with each other and then with the trainer and will receive a written answer to the problem.

Exercise 1

Your client intends to buy a company without undertaking a sufficient due diligence exercise. You highlight the risks that such a proposal would involve and indicate how these might be mitigated by targeting the investigation of the reporting accountants appropriately.

Exercise 2

Your client wishes to purchase a conglomerate. You are asked to plan an effective legal due diligence (to be undertaken within a short timeframe) to uncover any financial, operational or legal problems that may not have been sufficiently disclosed in the Information Memorandum.

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