Due diligence: looking beyond the balance sheet – BDO Abogados

Potential acquirers are now looking well beyond target’s mere financial performance to assess whether they should buy or not

There was a time before the global recession took hold when due diligence was seen as a matter of formality. Since 2007 however, according to Anna Terricabras, Manager of the BDO Abogados M&A division in Madrid, many companies now rank it among their main priorities when deciding to buy.
“Acquirers are again risking a lot more of their own money on M&A deals because of a lack of bank finance,” she says. “Clients want to know as much as they can about a target before a purchase.”
The focus of due diligence has also sharpened. Issues such as earnings before the deduction of interest, tax and amortisation expenses (EBITA), and labour and tax matters were always included in analysis, but nowadays clients are asking for a deeper review – topics like environmental policy and corporate social responsibility are notable areas of scrutiny.
“Profit margins are still crucial but clients now look beyond EBITA and to a target’s wider contingencies,” adds Terricabras. “For instance, it is important to know if an asset has any potential tax liabilities, or how it performs in its treatment of employees because the labour laws in Spain are so strict.”
As an example of a potential problem an acquirer may confront, there is a growing abundance of “change of control” clauses in corporate credit agreements. This means that any lending bank needs to provide its consent before a company changes hands. If this does not occur, then the banks can withdraw the financing.
This desire for deeper, more detailed, analysis means companies are also much more involved in the process than they may have historically been. Terricabras’ experience is that clients increasingly want more and better communication to update them on developments and findings.
“We have even had cases where the client has wanted to work directly alongside us on conducting the due diligence. Smart acquirers are taking the ‘better safe than sorry’ approach to M&A.”