How To Automate Due Diligence Tasks For Mergers And Acquisitions

Due Diligence

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Is your business set for an M&A transaction?

If you’ve done this before, you know all too well the massive amount of legwork that falls on your company’s shoulders to determine if a merger or acquisition is profitable, or if you should be looking at other options.

This can mean unending trawling tasks through balance sheets and exhausting heaps of market research. That’s in addition to the processing of hundreds of new contracts to finalize the onboarding process, and determining a prospect’s data privacy stipulations, among other policies.  

Fortunately, with automation tools, your business doesn’t have to diverge too much time and resources into M&A and Due Diligence

A lot of this iterative data processing work can be bypassed to focus more on critical aspects and speed up the deal. In this article, we’ll be talking about how to automate due diligence tasks for mergers and acquisitions via a 5-step automation process.

Let’s begin.

1. Create an Automation Strategy For Acquisitions

Why do you need an M&A automation strategy?

That’s because up to half of automation projects fail, according to a 2019 EY RPA study. Furthermore, most of these failures trace back to scalability issues and unrealistic expectations, all arising from the absence of an automation strategy. 

Every business move you make should be motivated by a strategy and super specific goals. That rings even truer for automating mergers, acquisitions, and consolidations, where apparently logical and profitable transactions don’t often work out as hoped. 

So just as you would create an acquisition strategy for your transaction, consider the same for potential opportunities for automation.

automating due diligence for M&A: automation strategy

In our case today, these opportunities for M&A and due diligence include:

  • Market research for identifying targets
  • Liquidity valuation of sellers
  • Contract analysis for acquired suppliers
  • Review of data governance strategies 

Depending on the exact nature of the deal, you may need to shift automation goal posts, especially when deciding what software exactly you will be bringing on board.

Moreover, will this software require staff training?

Often, an umbrella automation solution lies in content intelligence tools, which have great scalability even for companies with different content management systems. This makes it the focal point of the automation opportunities we’ll be discussing today. 

2. Determine Growth Markets with AI-driven Research

Every successful M&A strategy is born out of proper market research. The absence of which, would mean businesses going in blind and bridging two separate markets with no idea of how the integrated business would perform.

With improper market research, the final synergies between your business and the seller will be off and both parties are bound to be affected adversely by the transaction, given how quickly external market factors change.

This is further echoed by a Harvard Business Review report, which states that over 70% of M&A deals fail, with poor market research among the contributing factors. It’s clear M&A and due diligence is important as far as the market is concerned. However, it may not be so clear how companies can go about automating the process.

M&A and due diligence: Intelligent market research

With content intelligence tools, a lot of the manual data entry and sorting work that comes with carrying out market research can be automated, making work easier for your data analysts.

Now instead of manually combing through countless pages of market demographics and competitor data, your staff can rely on software to digitize and automatically classify this information for easy retrieval.

As a result, it becomes easier for your M&A analysts to get the specific market data needed given that similar content is grouped together, and also previously non-searchable files can now be located with simple keywords for more comprehensive scrutiny.

Additionally, you can rope in predictive analytics tools to work out volatile, external market factors. Your business can then add another layer to its market research by also taking into account the long-term performance of a prospective market. 

3. Assess Liquidity via Intelligent Document Processing

Simply put, liquidity is the ability to sell a new acquisition fast without taking a huge drop in the selling price.

Why is liquidity important for M&A and due diligence?

Without verifying the liquidity of a target business, you may settle for a lower selling price if your business is backed into a corner and forced to resell for some reason. 

This reason could be due to an unforeseen pandemic or even an Act of God event obstructing normal business operations and necessitating the need to sell to cover unexpected debts or lower operational costs to achieve sustainability.

Moreover, there’s the need to perform a comprehensive liquidity analysis of your proposed merger and acquisition targets to also ensure that your business can get financing when push comes to shove.

M&A and due diligence: Liquidity automation

By automating liquidity due diligence, your business can get the financial insight it needs to determine the fate of an M&A deal faster and more accurately.

The first step involves requesting the seller for a compilation of all their assets and liabilities, both of which are often detailed in financial audit reports. Typically, this information is locked up in electronic and manual balance sheets, and automation software can ease the sorting process.

Using an intelligent document processing tool, which is a major facilitator of how to automate due diligence tasks for mergers and acquisitions, your accounting department can digitize these balance sheets from a variety of sources, making them easily searchable.

Accountants can then tap into this information to work out the value of current assets and liabilities, and use that to determine a current ratio.

If the current ratio proves ideal, i.e. anything above 1 but preferably between 1.5 and 2.0, then you’ll know a potential M&A is worth the investment.

4. Carry Out Intelligent Contract Analytics

Why is contract analysis important for M&A success?

That’s because approximately 75% of projects fail due to contractual issues, according to research by World Commerce and Contracting.

When your business is getting into a merger and acquisition transaction, there are new contractual obligations that come with it. First, the selling company has its own network of suppliers, who’ll also become part of your business if the deal goes through.

Analysis of these contracts is important to ensure these meet any Economic, Social, and Governance (ESG) policies you might have in place as the buying company, among other supplier considerations that matter to your business.

Second, there are also the new employees who’ll be coming on board with certain contractual expectations, which you may not be willing to meet as a new employer.

M&A and due diligence: Contract analytics

Contract Intelligence Software can help your company better evaluate new contracts by automating the analysis of a corpus for key contract details.

This is made possible by natural language processing tools, which can structure countless contractual documents, and help your legal team to effectively dig into vital specifics without performing manual reviews.

Legal officers can easily surface buy-side and sell-side clauses, enabling your business to work out new deals with these suppliers if you’re not in agreement. 

In a similar manner, your business can also perform M&A and due diligence for other critical contract terms like the change of control language and retention rights, among others.

Here’s an example of a Contract Analytics ROI Calculator which quantifies how automation eases the M&A process.

Incorporating your business revenue, workforce, and an expected surge of new contracts, you can better determine ROI and other essential details.

5. Review Target’s Data Governance Strategy   

Data Privacy regulations are also at the heart of M&A research. 

Typically, as the buying company, you need to think about the fact that the transaction will involve merging two different data governance strategies as the finish line inches closer. 

The research work entails several structured and unstructured data streams, where manual remediation would mean certain data privacy and compliance risks can sneak into a combined governance strategy. 

If this hybrid strategy would involve breaking into new regions, there are new data laws to consider during M&A and due diligence.

 Automate Due Diligence Tasks For Mergers And Acquisitions: data governance analysis

Content intelligence can again save the day here, simplifying bid data by enabling your business to scan huge schemes of amalgamation. 

This document contains important employee information, which OCR technology, coupled with cloud content intelligence, can help your HR department quickly scan for important data governance concerns.

At the top of the list, is whether the target company has a Data Protection Officer, which is a punishable requirement for public companies in the EU region. 

Another search criteria for the software could be data policies detailing how clients’ PII is protected, including data moderation or encryption, among others that regional laws dictate. 

Conclusion

Is content intelligence part of your M&A and due diligence process? 

If not, you should know that human blunders from manual data processing account for 4 errors in every 100 entries, which means the fuel data for your M&A transactions won’t be reliable. This is according to research by Opin. 

Human-only due diligence can lead to grave errors for buying companies, mistakes which can also arise from costly acts of omission. 

To minimize human intervention and mistakes, your business should act on these pointers on how to automate due diligence tasks for mergers and acquisitions.

From liquidity analysis and data compliance risk assessment to market research and contract intelligence software, AI-powered tools can alleviate much of the work, and risks, associated with getting M&A transactions over the line.

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