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The importance of due diligence in the process of M&A

Transactions that go through due diligence give you a better chance of success.

From the point of view of the buyer, due diligence allows him to verify that his expectations regarding the transaction are correct. In mergers and acquisitions (M&A), buying a business without conducting due diligence significantly increases the risks.

From the seller’s point of view, due diligence is done to establish credibility. Due diligence can also bring tangible benefits to the seller, as a thorough financial examination may reveal that the fair market value of the seller’s company exceeds the initial value. Therefore, often, sellers themselves prepare reports on the results of due diligence before potential transactions, so as not to sell the company below market.

How is the support of M&A transactions?
How is the support of M&A transactions?

Scope of work during due diligence in M&A transactions

There is an exhaustive list of possible issues in the due diligence procedure. Additional questions may be required for specific industry mergers and acquisitions, while smaller transactions may require fewer questions. The following are typical due diligence issues that are reviewed in mergers and acquisitions.

Company overview

  • Why do company owners sell their business?
  • How long have owners been trying to sell the company?
  • What stages of development did the company go through?
  • What are the strategic goals of the company?
  • What is the scale of the company in terms of different countries?
  • What is the list of goods/services of the company?
  • Did the company have experience merging with other companies, acquiring other companies?

Financial performance

  • Is accounting maintained?
  • Are financial statements audited?
  • What are the company's turnover, income, profit?
  • What are the expenses of this company?
  • Does the company have debts, other unliquidated obligations?
  • Does the company have enough financial resources to cover the transaction costs of the deal?

The intellectual property of the company

  • Does the company have a brand?
  • What trademarks are registered?
  • Does the company have patents?
  • Is there a mode of keeping trade secrets?

Strategic compliance

  • How will the company fit into the buyer's organization?
  • What will be the result of a merger or acquisition?
  • What will be the market position of the new company after M&A? Consideration of the range of services/products and their competitive advantages.

Target audience

  • The customer base of the new company;
  • The target audience of the company.

Management/staff

  • The structure of the company;
  • Payroll system;
  • Payments to employees;
  • Work schedule;
  • The structure of board members and the management/decision-making mechanism.

Legal issues

  • Does the company have ongoing litigation?
  • Are there any claims to the company in the pre-trial settlement of the dispute?
  • Company litigation history;
  • Are there any lawsuits with state/local authorities?

Information technologies

  • What software does the company use?
  • What protection systems are there?
  • IT structure of the company.
  • Company resources for the annual maintenance of IT specialists, infrastructure.

Corporate issues

  • Company constituent documents;
  • Who is on the board?
  • What is the composition of the founders?
  • What does the company structure look like?
  • Who are the holders of securities (holders of options, preferred shares, warrants) of the company?
  • Are there any subsidiaries?
  • Are securities issued properly and in accordance with applicable law?
  • Are there any documents on recapitalization or restructuring?

Marketing due diligence

  • Assessment of the company's position in the market;
  • Checking the reputation of the company;
  • Determining the competitiveness of a company;
  • Benefit analysis; assessment of omissions.

Our due diligence services

List

  • Legal audit of the company (verification of the legal form, corporate documents, the staff of the company, labor legislation, etc.);
  • Financial audit of the company (audit of accounting, reporting, auditor);
  • Assessment of the tax system of the company (analysis of the taxation of the company, verification of the application and legality of tax benefits and deductions; assessment of the income and expenses of the company);
  • Determination of the competitiveness of the company and its market position;
  • Verification of the company by the register of court cases, sanctions imposed on the company, participation of the company, and its employees in litigations.
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