Successful financial services practice mergers or acquisitions require a great deal of behind-the-scenes preparations, with due diligence on both sides of the transaction being of utmost importance. Whether you're considering buying an existing practice or selling yours, you'll need to perform due diligence. The process can be overwhelming, making it smart to start with a due diligence checklist.
Use the due diligence checklist below to ensure that nothing is overlooked. This due diligence checklist is meant to prompt you along the way, covering the more common steps you'll need to perform throughout the transaction. It is by no means an exhaustive checklist, but rather a starting point. Since each transaction has its own unique circumstances, feel free to modify the checklist to best meet your needs, as well as add any relevant steps that would be beneficial.
Both parties involved in a business transaction owe it to themselves to perform due diligence on the other party and even on their own company.
Regardless of which side of the transaction you are on, it's wise to get your attorney or CPA involved in the due diligence process. In fact, that's one of the first steps of our checklist.
Due diligence isn't something you need to do on your own. We suggest building a team consisting of the following members:
You and the other party will be sharing extremely sensitive information with each other, making non-disclosure agreements and document security top concerns.
Now it's time to analyze the viability of the business itself. Identify the following:
Note: Truelytics is a tool both parties should consider using to collect the above information and to help establish a fair valuation.
What about the business's most important asset, its client base? Are there any potential issues concerning transferability?
Now let's check to be sure the firm's financials and taxes are in order. You'll want to gather (if you're the seller) or obtain (if you're the buyer) copies of the following dating back at least three years (as well as year-to-date interim statements):
Next, review all applicable contracts and agreements the firm has entered into. This includes:
Now it's time to examine the other party's licensing and compliance status. Depending on what you discover, you may need to investigate further to determine whether it makes sense to proceed with the transaction.
Obtain and review the following:
The practice's operational assets and personal property included in the deal will need to be evaluated.
As a buyer, the other party's information technology goes beyond hardware and software; you'll also want to evaluate the system's security and potential vulnerabilities. If the firm's security needs an upgrade, it could be at a higher-than-expected risk for hacking or a security breach. In addition, you'll want to determine if the two merging companies' systems are compatible.
As part of the cybersecurity risk assessment, work with an IT security consultant to evaluate the following:
Now it's time to do due diligence on the practice's human resources. You'll need the following:
Finally, assuming everything else is in order, you'll want to review the general terms of the transaction such as the following:
Finally, after the team conducts its due diligence, a process that could take several months, you'll need to create a final due diligence report detailing the team's findings. This report will summarize all of the potential issues found and highlight the positives uncovered.
In general, the due diligence report will come to one of three possible conclusions:
Whether you're buying a financial services practice or selling one, it pays to perform due diligence on both your own firm and the other party's. Examining your own organization early in the timeline allows you to remedy any potential issues before they interfere or devalue your firm's worth.
By performing due diligence on the other party, you will gain deep insights into the other party's business structure, business health, management team, employees, practices, revenues and revenue sources, client base, opportunities, risks, assets, liabilities, and more. These insights are necessary to make a well-informed decision so that you can either continue on or scrap the deal based on real information and not emotion. Either way, using this due diligence checklist will help you make a smart decision with confidence and put you in a much stronger bargaining position.
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