Neglect due diligence at your peril
2 February 2018
The due diligence process for any M&A deal must be robust because establishing the true value of any transaction can be tricky.
Historic financial data is never a reliable guide on its own to future success – and Brexit has added an extra layer of uncertainty. Buyers are worried about intellectual property, employing foreign workers, data protection and cyber-security.
When it comes to sensitive data, for instance, it is still unclear how the UK will be affected, post-Brexit, by the European Union’s General Data Protection Regulation which comes into force in 2018.
Exporters and importers will be influenced in different ways by Brexit and buyers are being urged to study commercial contracts and regulations more carefully when negotiating any deal.
Head of investment banking at Investec, Andrew Pinder, says companies involved in M&A talks must think through different Brexit scenarios until the UK/EU negotiations are complete. “You need to do a lot of due diligence on how the UK leaving might affect the price you pay,” he says.
David Petrie, Head of Corporate Finance at the Institute of Chartered Accountants in England and Wales, agrees that buyers must take more care. This means examining meticulously what proportion of revenues depends on exports to the EU, and assessing closely the future availability of skilled and unskilled labour recruited from the remaining 27 EU member countries.
He says buyers should also use modern data analytics to assess the worth of different products made by a company. Data can clarify how much value is being gained by the current devaluation in sterling and where there is underlying profitability.
“Companies must also look at the supply chain and question whether parts and raw materials could be purchased from UK manufacturers rather than in euros or dollars,” says Petrie.
Co-chair of the M&A Group at law firm DLA Piper, Jon Kenworthy, says buyers are becoming smarter about what due diligence they commission.
“Five or 10 years ago it was common for law firms to be given data, write a long report and give it to clients,” he says. “Today clients want to have a better understanding of what is really driving a company’s value. For example, what contracts are in place, how long are they and how important are the people and management currently running the business?”