Corporate Structure​

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The corporate structure of the target will be analyzed to determine the organization of the company. This includes looking at the incorporation documents as well as operating agreements such as the Articles of Incorporation and Corporate Bylaws. The make up of the current board members, current shareholders, and any rights or preferences given to investors should also be assessed. 

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Market Due Diligence Approach

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Taking a market approach to analyzing the corporate structure includes looking at the target's organization in relation to other players in the market. This may include conducting discreet research to determine corporate and financial structures of third-parties in the market to determine if the target is organized to meet the goals of the acquisition, such as equity ownership and control.

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Analyze Financials

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Income statements should be reviewed to determine revenues and net profit or loss. The target's balance sheets should be scrutinized to determine assets and liabilities, and to explore any discrepancies or areas of concern to maximize clarity and minimize risk. Additional documents that may be reviewed include budgets and forecasts, as well as company projections for growth and profitability going forward. Additionally, the financials of the target should be compared with its competitors and other market participants to determine appropriate valuation multiples.

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Market Due Diligence Approach

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Often it is difficult or impossible to obtain financial documents from third-party market competitors. While the documents may not be available, the information contained in them may be obtained from non-traditional sources. The information may be gleaned from statements made by a company, or from speaking with other market participants, suppliers, and the like to piece together the missing data. 

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Taxes

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Tax forms​ and federal and state tax filings should be cataloged and reviewed. An inquiry should be made into any previous or pending government audits to determine if there are any anticipated tax liabilities. Additionally, any tax credits the company may currently be enjoying should be noted, and the likelihood of a continued credit or changes to government policies that may effect the valuation of the company should be determined. 

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Market Due Diligence Approach

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Much like with other financial documents, tax filings are generally not provided by third-parties unless they are publicly-traded. For small, privately-held corporations, it can be impossible to obtain actual tax filings. Using market due diligence strategies, it may be possible to obtain the missing data through non-traditional sources in order to get a clear picture of the target in relation to its market competitors.

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​Legal

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Any previous or pending legal actions or litigation taken by or against the target should be reviewed and assessed. Additionally, any Intellectual Property of the target, such as any current or pending patents, trademarks, copyrights, trade secrets, or licensing agreements should be reviewed for ownership, compliance, strength, and other important considerations. ​

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Market Due Diligence Approach

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Sometimes a target may look like it has relative strength in a given market, perhaps due to its contractual agreements, or from its intellectual property assets. This information, taken alone, may paint an unrealistic picture of the true strengths of the company. There may be a new player in the market that is developing technology that will make the target's obsolete or at least less valuable. There may also be movement afoot that would place the supplier and dealer relationships of the target in jeopardy. In order to accurately assess the value and liabilities of the legal assets or obligations of a company, it is necessary to conduct market research to determine what else is going on in the market. 

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Assets

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The company's material assets should be inventoried to assess and valuate products, inventory stock, real estate, equipment, and technology used in the course of operations. In making this assessment, it should be noted whether the assets are owned or leased, their current condition and market value should be determined, and the relative strength of the company's assets in relation to the current market and technological advances must be analyzed. 

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Market Due Diligence Approach

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In order to assess the strength of the target's assets, it is necessary to determine the strength of assets held by market competitors. When deciding between two or more possible acquisition targets, the relative differences between the assets - including quantity, quality, technology, ownership, etc. - can be an important variable. Market research is necessary to make this assessment when the information is not generally available, such as with privately-held corporations who don't open their books publicly. 

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Customers

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Current and anticipated customer base should be analyzed to assess the strength and size of the company's market share. Potential market size and any areas for possible expansion should also be assessed. Additionally, facts such as customer acquisition costs, customer lifetime value, and other key performance indicators should be researched and evaluated.

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Market Due Diligence Approach

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When assessing the strength of a company, some of the most valuable data comes from the customer. Market due diligence includes applying the Voice of the Customer (VOC) process. The VOC process includes gaining customer feedback about their needs, wants, expectations, and satisfaction. As is true in most situations, the best data comes directly from the source, and VOC aims to do just that.

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Business Associations

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Current and anticipated business associations and agreements should be researched and analyzed for any current or expected customer, supplier, or dealer.  Such factors as the length of the agreements, any unique aspects such as exclusivity rights, and an assessment of the relative strength or reliance on the agreements to the continued profitability of the company should be analyzed. 

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Market Due Diligence Approach

 

The same concepts and procedures as applied to customers can be applied to various business associations as well, including suppliers, dealers, competitors, and other third-part market participants. Talking directly with these players can be tricky work, and discretion is usually advised. Conducting such research is best left to experienced due diligence experts who know what information to get, how to get it, and how to not create any additional problems that could influence the deal.  

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Management and Employees

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The management organization, structure, and experience of the company should be assessed in order to determine its relationship to pre or post-acquisition operations. It is important to note any employment agreements, to include rights or options that employees may have. This may include such things as stock options and vesting, severance and termination rights, non-competition and non-solicitation obligations, and so forth. 

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Market Due Diligence Approach

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A market approach to assessing the management team and employees includes conducting customer interview and surveys, as well as talking to third-parties in the market. Insights from this process include an understanding of the opinion and respect employees have for the management team, what the company culture is like, and how the industry regards the company. This can provide actionable data regarding necessary changes that need to be made by the acquiring firm, while also creating expectations for management and employee retention as well as recruitment post-acquisition.

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