The benefits of due diligence in M&A transactions

In this month’s column we would like to talk about the benefits of due diligence in M&A transactions. The reason that we take up this basic issue is that we have seen quite a few Chinese clients who have only remotely heard of the term due diligence, while others knew it to be a necessary step in an M&A transaction but tried to avoid it anyway because they conceived it only as a cost factor, without any benefit.

What is due diligence?

Generally, due diligence refers to the care a reasonable person should apply before entering into an agreement or a transaction with another party. In an M&A transaction “due diligence” stands for a structured process where the seller discloses confidential information about the target to the buyer for review and evaluation.

It serves to disclose all commercial, financial, tax and legal facts and properties of the target to enable the buyer to properly assess the risks and chances associated with the target and, consequently, to gain a better understanding of its value. Usually buyers engage advisers to do the financial, tax and legal due diligence, which, of course, adds to buyer’s transaction costs.