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Due Diligence for M&A's Isn’t Glamorous but Oh So Important

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Sarah Jolly. November 01, 2018 . mergers

Movies would make you believe that M&A is the glitzy side of finance if, of course, such a thing even exists. However, Embark has some difficult news for you if there’s a merger or acquisition in your future and you’re already picking out your private jet and Corinthian leather patio furniture -- movies aren’t real.

Embark-Blog-DueDiligenceforM&As

A successful M&A is about meticulous preparation and methodical action, not corporate intrigue and dramatic third acts. It’s a process that takes dotting I’s and crossing T’s to a new, almost obsessive level. Given the scrutinizing eye placed on these complex transactions, this is an instance where obsessiveness is an absolute strength and helps makes certain nothing slips through the cracks.

Download: Technical Accounting Subjects to Know for an Acquisition

To guide you through the process and keep you from going astray, your friends at Embark have put together a few thoughts on the necessary financial and accounting due diligence for M&As. As always, Embark is here to make your life a bit easier and your M&A dreams a rousing success. This isn’t Tinseltown, it’s real life, so put down the glossy private jet brochures and roll up your sleeves because it’s time to get to work.

  • Financial Statements: Annual, quarterly, and monthly financials must be ready to roll and in good order. Audited financials will be an inevitable requirement so make preparations early and have your financial ducks in a row.
  • Forecasts and Budgets: Both forecasts and budgets require board approval and must adhere to GAAP standards.
  • Working Capital: Review and project. Running out of money midstream is, shall we say, frowned upon.
  • Revenue Recognition: Be cognizant of any unusual issues for the company or industry.
  • Accounts Receivable: Look for aged accounts receivable. Not everything old is new again.
  • Intangible Assets: Identify and properly account for any patents, trademarks, and customer agreements.
  • Software: If the company relies on specific software for operations, research any underlying subscriptions and when software renewals are due.
  • Customer Concentration: Identify any possible customer concentration risks and issues, taking steps to diversify as needed.
  • Material Contracts: Know what you’re getting yourself into and establish sufficient oversight of key contractual arrangements.
  • Environmental Reserves and Asset Retirement Obligations: Get to know ASC 410 and fully understand your responsibilities and potential liability for non-compliance.
  • Employee Agreements, Severance, Incentive, Bonus Plans: An obvious source of future costs, make certain you account for these future obligations to prevent unwelcome and expensive surprises down the road.
  • Allocations from Parent or Management Company: Understand how everything flows, what goes where, and who gets what after the transaction.
  • Related Party Transactions: Identify and account for all related party transactions and understand pricing relative to the market.

READ NEXT: How Accounting Should Support an Acquisition or Merger

As we said, it’s not very glamorous but the importance of such items is difficult to overstate. Obviously, you can make a go of it on your own, letting our sage guidance lead the way. However, Embark can always come in and put our vast M&A experience and expertise to work if you lack the time or in-house talent to properly sift through the inescapable mountain of data and tasks. Either way, take deliberate steps, know where you’re going, and you’ll successfully make it to the other side. Now get to work.

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