A Toolkit for FRMs for M&A Due Diligence

To achieve growth and operational efficiency and acquire new capabilities and resources, companies get into Mergers and Acquisitions (M&A). Since this M&A involves high risk, there is a need for a financial risk manager. The job of a risk analyst is to assess the value return from the expected business deal. During the deal, a ton of sensitive, financial, marketing, and intellectual information may be exchanged between parties, and make sure there is a mutual agreement between you and the party in this case. To stay focused and organized, we bring you a checklist of information that you can demand from the other party while signing an M&A deal. Let’s start with broad strokes and then try to narrow it down whenever you try to uncover a red flag. 

Documents 

FRM professionals need to keep a check if your business partner has not followed expected formalities. The first thing you can expect from your partner is the initial documents, growth, and expansion plans. The operation is detailed not only in the base state but also in any other associated regions. Risk managers also need to probe into the business entity structure, rules, and regulations created by the owners. Meetings, minutes, and resolutions are passed by the managers and stakeholders. This history can allow you to assess the risk of the entity 360-degree instead of getting carried away by compliance history alone. 

Financial Records

Understanding your partnering entity’s financial performance should be the baseline focus of FRM professionals. Never take anything for a word from your partner rather than something solid in black and white to get a precise picture of their performance. Never settle with a single record of a year or two, but at least a record of the past 5 years. This will help you understand the trends of your partnering entity’s financial performance in full. 

Contracts 

One of the reasons why you may be interested in your partner entity is because of its wide networking partners, but reading these agreements is as important as the risk professionals. Reviewing these agreements or contracts will give you a big picture of whether they are one-sided or contain impractical obligations that may not support your goals and targets and thus limit your growth scope. This will help you decide whether contracts are a profitable engagement or not. 

License

As part of the FRM, you may be trained to have an investigative mind in looking into the license and permits when you enter into mergers and acquisitions. It is highly practical for an FRM to check whether your partnering entity has obtained the right license and permits and they are active. This can be a deal-breaker to avoid any penalties in the future in the form of lawsuits, legal claims, and obligations. 

Employee  Information 

Getting to know the best management practices in your partnering entity’s organization is something crucial. As FRM professionals you can discover the potential pitfalls in terms of hiring when you are making a transition for continued operations. As a prudent step, you can ask for a copy of the employee working and management policy manual, retention plan during the transition, downsizing, and other future plans. 

Brand

A company’s reputation is reflected in its brand strategy and positioning. Risk strategists need to consider this a top priority. Request for a customer review chart or customer satisfaction survey to understand the problems within your partnering company and their customer base and whether they are profitable to your synergies. 

As a start, just begin with these questions and see if everything is in place or raise red flags for adequate information to meet target goals and make informed business decisions as you advise your company to merge or acquire the partner.