Mitigate Risk and Maximize Value With Expert M&A Due Diligence

Mergers and acquisitions can be complex and time consuming. Because of the finite timeline and specific skill set required, many CFOs may not have the necessary expertise to confidently execute successful M&A deals. They also may become stretched too thin if they are handling this process while also running day-to-day operations. 

Enter the outsourced strategic advisor: This valuable outside perspective, from deal sourcing to M&A due diligence to closing, can help make the process more efficient, mitigate risk and maximize value.

Identify the appropriate valuation and analyze projected synergies

You may have investment bank M&A executives advising on an acquisition, and they may show high levels of optimism around a transaction. A CFO advisor offers a more measured, data-driven approach to valuation by creating Net Present Value (NPV) and Internal rate of Return (IRR) models that offer a long-term outlook. These projections will give scenarios of how a deal could look in 3 to 10 years and decrease the risk of overvaluing an acquisition.

Creating a robust and effective financial model to evaluate a transaction or market opportunity is key to M&A due diligence. While corporate development groups often create projections like this, a strategic advisor who has managed prior M&A transaction advisory will have the pattern recognition to call out if there are concerns or unseen value in the models. This objective view acts as a stress test by using quantitative analyses and insights from your finance team.

Getting the valuation wrong in M&A due diligence can lead to overpaying and a deal that doesn’t hit its ROI target. Large writedowns are one sign of a failed deal. In 2019, CVS Health announced over $6 billion in writedowns and impairment charges following its acquisition of nursing home pharmacy Omnicare, indicating that CVS overpaid for the purchase. 

A CFO with deep M&A experience can help lessen this risk because they will be experts at analyzing deal value through creation of rigorous models that project future synergies from a transaction. Synergies from M&A often play a key role in driving value creation from deals. According to a 2020 survey by Ernst & Young, 53% of CFOs cited synergy identification as part of the diligence process to be most important in achieving deal value. 

Answer questions and identify potential pitfalls early

An M&A deal is often a lengthy process, and unexpected issues or slowdowns could stop a deal from closing. 

Consumer global products company Mondelez, which owns Nabisco and Cadbury, tried to buy competitor Hershey in 2016, but the deal fell apart when Hershey rejected the offer. Analysts blamed Hershey’s demand for a higher valuation and a large Hershey shareholder’s legal issues.  

Is the company audit ready? Do they have strong internal controls set up? What are the nature and extent of the seller’s contingent liabilities? Are there any problematic contracts, litigation risks, or intellectual property issues? 

These are all questions an investor may have, and they’re particularly important when acquiring a private company, where there’s limited public reporting of information. The insights and analysis a CFO with M&A expertise brings enables a business to answer these questions and identify potential issues early. This can be the difference in a successful or failed transaction.

Thorough M&A due diligence increases chances of getting deals to the finish line

There’s always risk that an M&A deal can fail, but a buyer can mitigate potential issues with smart due diligence. When an expert completes thorough analysis of the target’s financial metrics and historical financial statements, as well as internal policies and controls, the acquiring company benefits. Furthermore, the clarity gained around the quality of earnings often has a direct impact on deal value.

An investor likely will also have questions about the growth profile of the target company, customer concentration and the sales pipeline to determine if an investment opportunity is right for them. 

A venture capital client preferred to keep their M&A due diligence objective by hiring a third party when assessing an equity investment in a PaaS (platform-as-a-service) company. Paro connected the VC firm with a 20-year finance veteran who had raised over $0.5 billion for clients. 

After the expert delivered detailed reports and analysis on everything from the target company’s revenue recognition models to internal controls to detailed growth profile, the investor had confidence in moving forward with a $20+ million investment.

Gain the benefit of M&A due diligence expertise

A CFO advisor who has years of experience in driving M&A success can assess whether a deal will achieve the desired outcomes, perform necessary due diligence and help ensure that your business achieves its goals with the acquisition. 

At Paro, we precisely match clients with the right services and subject matter expertise to achieve specific goals. Our exclusive, carefully curated network of remote finance experts provide a range of over 100 financial services, ranging from basic bookkeeping and accounting to highly specialized corporate development and strategic advisory. Request a consultation today.