Acquisition Due Diligence
Importance of Due Diligence
Transactions that undergo a due diligence process offer higher chances of success. Due diligence contributes to making informed decisions by enhancing the quality of information available to decision-makers.
From a buyer’s perspective
Due diligence allows the buyer to feel more comfortable that their expectations regarding the transaction are correct. In mergers and acquisitions (M&A), purchasing a business without doing due diligence substantially increases the risk to the purchaser.
From a seller’s perspective
Due diligence is conducted to provide the purchaser with trust. However, due diligence may also benefit the seller, as going through the rigorous financial examination may, in fact, reveal that the fair market value of the seller’s company is more than what was initially thought to be the case. Therefore, it is not uncommon for sellers to prepare due diligence reports themselves prior to potential transactions.
Why Carry out Due Diligence?
There are several reasons why due diligence is conducted:
- To confirm and verify information that was brought up during the deal or investment process.
- To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction.
- To obtain information that would be useful in valuing the deal.
- To make sure that the deal or investment opportunity complies with the investment or deal criteria.
Costs of Due Diligence
The costs of undergoing a due diligence process depend on the scope and duration of the effort, which depends heavily on the complexity of the target company. Costs associated with due diligence are an easily justifiable expense compared to the risks associated with failing to conduct due diligence.
Parties involved in the deal determine who bears the expense of due diligence. Both buyer and seller typically pay for their own team of accountants, attorneys, and other consulting personnel.
Acquisition Due Diligence Case Study
MCM were instructed to conduct compliance due diligence on behalf of a private equity fund on a national wealth management & financial advice business in preparation for a possible acquisition by the fund
What did MCM need access to?
We requested data and documentation across a wide range of areas, including its compliance monitoring plan, policies and procedures, wider systems and controls and its regulatory correspondence.
What did MCM do to audit the company?
Amongst other things, we audited the target firm’s internal governance and its systems and controls against what the FCA currently expects. We also looked at its technology governance and systems and controls and how well these reflected the regulator’s current expectations – particularly in terms of any vulnerability to financial or cybercrime.
We mapped the activities the firm carried out against its regulatory permissions, verified all returns made to the FCA and the firm’s compliance with Prudential Regulation, and reviewed the responsibilities and roles for all those in Senior Management Functions roles as defined in the Senior Managers and Certification Regime (SM&CR).
What was the outcome?
MCM provided our clients’ decision-makers the information they needed to make a decision on whether to proceed with the acquisition with a detailed compliance audit report. We also highlighted a list of challenges the client would need to address if it decided to proceed.
Due Diligence Activities in an M&A Transaction
There is an exhaustive list of possible due diligence questions to be addressed. Additional questions may be required for industry-specific M&A deals, while fewer questions may be required for smaller transactions.
Why Due Diligence Matters
Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.
The regulatory compliance review and audit, conducted by our acquisition due diligence experts, can cover the
following areas, as needed:
- FCA correspondence history (including any disciplinary action)
- FCA financial returns and compliance with prudential regulation
- FCA permissions against business undertaken
- Corporate governance and systems and controls against FCA objectives & requirements
- Suitability assessments on advice or investment management to include defined benefit pension transfer advice.
- Investments sold (standard and non-standard)
- Professional Indemnity Insurance cover (including exclusions)
- Client money and client assets controls
- Complaints history
- IT governance, systems, and controls against financial and cyber crime
- Senior Managers and Certification Function persons’ roles, responsibilities, and contracts
- Anti Money Laundering & Financial Crime risk framework