MERGERS AND ACQUISITIONS – DUE DILIGENCE ANALYSIS

In today’s era of burgeoning global trade, strategic merger and acquisition transactions are increasingly being used by companies as powerful tools to unlock growth and capitalise on market opportunities. Careful and thorough planning and prior investigation, conducted by the correct professional deals team, is a critical but often overlooked aspect of successful and optimal transactions.

In simple terms, where a company is seeking to streamline its operations, it may explore the possibility of disposing of the whole or part of its business, to another company (sell-side). Conversely, a company seeking to diversify or expand its existing business may look to acquiring another business (buy-side).

In either case, astute businesses choose to partner with trusted and experienced advisors to facilitate the necessary due diligence investigations, before embarking on a transaction.

KEY ELEMENTS TO A DUE DILIGENCE INVESTIGATION

A comprehensive due diligence investigation will typically involve the examination of information across various aspects of a business. This will enable companies on either the sell-side or buy-side of a transaction to make informed decisions before pulling the trigger.

An investigation conducted by a seasoned professional deals team is imperative to evaluate the historic, current and future risks, propose remedial steps, and assess the compliance status of a transaction.

This process analyses the corporate, financial, legal and tax affairs of the target business under consideration. This would include conducting audits of the business’ statutory documentation, culminating in a ‘red flag’ report, to ensure informed decision-making and the mitigation of risk. A typical due diligence has several elements, including:

Corporate due diligence:
An examination of the target business’ existing corporate structure, and documentation to identify risks and ensure compliance.
- Aim: To assist with a corporate compliance and readiness review of the target business and guide the process of addressing any areas of concern.
- Key Areas Scrutinized: The target business’ corporate structure including shareholding composition and active directorships, governance practices, regulatory compliance with the Companies and Intellectual Property Commission (“CIPC”), including a record of the historic filing of annual returns and ultimate beneficial ownership declarations.
Financial due diligence:
Analysing the target business’ historic financial records to audit past reporting, evaluate the integrity of internal controls, and ultimately prepare an accurate and fair valuation.
- Aim: Whether conducted on the sell-side or buy-side, a key focus area is to ensure transparency and identify potential risks that may impact a fair price valuation. This process can involve the use of market data, various valuation methodologies and the identification of key value drivers to facilitate confident price negotiations.
- Key Areas Scrutinized: The target business’ financial records, including historic audited financial statements, management accounts, financial forecasts, debtor and creditor analyses, and market position for strategic pricing considerations.

Tax due diligence:
A tax diagnostic review involves a high-level audit of the target business’ tax records, as declared to the South African Revenue Service (SARS).
- Aim: Perform a tax diagnostic on the target business’ eFiling profile, as held with SARS, which entails that the historic to current compliance status with SARS is scrutinised.
- Key Areas Scrutinized: The target business’ tax returns, across all relevant tax types, the identification of administrative and understatement penalties, accruing interest, the verification of registered details, and any outstanding tax owed to SARS.
Legal due diligence:
An inspection of the statutory, regulatory and legal compliance profile of the target business within applicable local legislative frameworks and provisions.
- Aim: Identify legal risks, liabilities, obligations, or issues that may affect a transaction.
- Key Areas Scrutinized:
  
  Review of existing supplier and customer agreements in force;
  
  Evaluation of active and potential litigious matters, including the possible financial and reputational risks emanating from this;
  
  Status of intellectual property assets, such as copyrights and trademarks, as well as any claims related thereto;
  
  Appraisal of competition law implications, and confirmation as to whether the transaction may qualify as a reportable transaction to the Competition Commission.

In light of the above, prudent businesses engage in a pre-implementation due diligence exercise before they move forward with a transaction. By selecting and partnering with a trusted deals team, comprising of seasoned accountants, attorneys and tax practitioners, complex and intricate transactions have never been simpler. Reach out today to schedule your advisory consultation!