General due diligence objectives
Whether deals are single country or global, and involve one or more countries, a few key objectives are critical to the due diligence process and to reaching a final purchase agreement.
Early red flags can help prevent a poor deal from getting signed and are typically issues discovered to have such a large financial impact that future profits would no longer provide the return on investment presented in the target company’s financials. For example an HR deal-breaker might be the discovery of a material under-funded pension liability, or executive change-in-control payments. These may be detrimental to the valuation of the company (to the extent they will be financed by the target company instead of the seller) and may also result in the departure of important leadership talent believed to be key to the company’s financial success.
While not all-out financial deal-breakers, these operational issues impact profits, cash flow, and the balance sheet, and must be addressed to ensure an accurate valuation model and fair purchase price. HR-related value-changers might be associated with the deployment of talent, compensation and benefit programs, or HR operations.
Mitigate material risks
Once the financial analysis is complete, the buyer needs to identify specific strategies that the seller must implement before closing (usually structured as part of the purchase agreement). This ensures that issues uncovered in due diligence are accurately captured and the precise remedies are defined. Perhaps the seller needs to restructure the workforce (and pay severance) before transfer of ownership or agree not to set up a generous new sales incentive plans before selling the company.
Realistically, these activities can only be performed once the buyer owns the business, but they are critical to ensuring the company runs as smoothly and efficiently as possible and realises the financial synergies from new ownership. These post-signing and post-closing activities include identifying priorities, establishing timetables, managing dependencies, and ushering resources to successfully carve out and stand up, transition, and/or integrate the target company.