For many businesses an acquisition will be the best and most effective way to strengthen market position and accelerate growth. There are many reasons why a potential target may be seen as beneficial to a business. These might include gaining access to new markets through the customer base, acquiring access to complementary products, removing a rival, consolidating purchasing power or moving into new territories.

Whatever the reason, the decision to make an acquisition shouldn't be taken lightly and the risks need to be understood. First, the acquisition will need to be financed. This may mean sourcing new equity or debt, potentially putting you and your business at the mercy of third parties. There is then the planning, due diligence, completion, post-deal integration and cultural alignment. Management of the tax issues will be required both before and after the acquisition. All of these are important factors if the deal is to be a success.

The due diligence process will normally cover commercial, financial and legal aspects, at a minimum.

Commercial due diligence

This involves a detailed review of the business plan of the target business in relation to the industry, competition and market conditions, together with an analysis of the prospects for the enlarged business.

Financial due diligence

Financial due diligence provides peace of mind to both the acquirer's management and their financial backers by analysing all the financial, commercial and strategic assumptions being made. Historical performance is used to form a view of the future and confirm that there are no black holes.

It enhances the purchaser's understanding of the target business, highlighting strengths that can be built on or weaknesses that need to be addressed, allowing informed decisions to be made. It also covers tax and, where applicable, regulatory matters.

The process also assists the acquirer and its legal advisers in drafting the sale and purchase agreement, so that adequate protection is afforded to the buyer and clauses relating to financial matters are unambiguous in their meaning.

Legal due diligence

An increasingly significant part of the value of a business is the intellectual property (IP) assets it holds. It's important to confirm the target has proper title to these IP rights. The acquirer must also establish that it will be able to operate freely post-acquisition, without the threat of legal action from third parties. These IP issues are normally covered off as part of the legal due diligence process.

Understanding the value and lifespan of these IP assets is crucial, not only to assess the effect on future reporting, but also to analyse what is being purchased and form an opinion of how much of the intangibles value included within the purchase consideration is, to some extent, protected.

IT and HR due diligence

Once the transaction completes, the hard work really starts. There should be genuine agreement between the two parties that the deal is not the final destination but a step along the way. Aligning cultures and values greatly improves the chances of success.

Every acquisition requires a certain amount of integration, but time spent on integration diverts attention away from innovation. The diversion may be minimised by integrating only those things that help to scale the business.

Carefully planning the integration process and updating it during due diligence will allow the action plan to be implemented quickly during what is generally a small window of opportunity.

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