Compliance Due Diligence Checklist

Why is the Compliance Due Diligence Checklist so Effective?

• It gives you a stronger assurance that you will not make a mistake when buying a business
• It provides you with an overview of the considerations and risks before going through a merger or acquisitions process
• It outlines practical steps and tips for how to thoroughly check the targeted business
• It provides executives with the security that employees will know what to do when the time comes for merging or buying another company
• It empowers you so you can avoid serious financial or credential consequences

Steps To Take Before the Acquisition

Before starting the whole acquisition process, the buy-side needs to form an M&A team that will know exactly what to do pre-acquisition.

It's crucial not to avoid taking a deep and complex look into the targeted company; namely its financial records and data.

• Explain to your team why is it so important to complete compliance due diligence
• Train this team to ask as many questions as possible about the target’s business functionality
• Even if it seems that the company you are buying or merging with does not have any “issues”, be sure to check everything
• Consider, ask, and examine the possible complications that could emerge after buying the company
• Allocate the resources accordingly for this task

How to Complete A Successful Compliance Due Diligence

Put the main focus on uncovering the crucial information about the desired business before you start buying. Some companies may have their violations hidden, and by merging this company with yours, you can become responsible for these violations. Compliance due diligence can help you avoid these M&A pitfalls. Specifically to have a successful compliance due diligence, follow these steps:

• Have a defined compliance risk profile set for the target company
• Make sure that the business you are buying did not violate any anti-bribery laws
• Check if the data protection rules have been implemented in the ethics of this company, and if they were, make sure that these rules have been respected and followed
• Ensure the trade regulations of the target company are respected
• Think in advance about the consequences of the specific issues you come across, and figure out their potential long term impacts on your current company
• If you are not sure about the last point, we recommend exiting the deal

General Compliance and Ethics Program

Frequently ask yourself these questions in order to conduct a solid background check and an initial report on the target business:

• Does the company have a code of ethics?
• Does the target company offer opportunities for it's employees to ask questions or inquire about their current work?
• Do the employees have the option of making a report to HR, and if yes, can they do it anonymously?
• Has the company ever conducted a risk assessment report?
• Does the company have publicly available financial records?
• Does the company keep its data in safe storage?
• Does the business conduct file back-ups on a regular basis?
• Are any bonuses available for workers in this company?
• Is there a summary of or copies of the monetary compensation plan?
• How are employees in this company receiving salary payments?

Risk Factors You Should Pay Great Attention to

Along with having a team collecting data about the target’s business routines, it is very important to search for several additional risk factors that will indicate the level of risk you will be taking if you decide to start negotiations. Before that, answer these questions and consider their possible consequences:

Nature of transaction

• What is the prime goal of my company in these negotiations?
• What risks have been uncovered so far in the process of due diligence?
• What is the payment method requested from my business in this deal?

Industrial risks

• How connected is the target company’s industry to your company's industrial area?
• Is that targeted industry regulated by the government?

Risks of this specific target company

• Was the target considered as competition before entering into negotiations?
• Was the target known for having issues or being financially unstable?
• What is the target’s full business history like?

Steps to Take When Starting the Negotiations

After conducting complex research and following the compliance due diligence for pre-acquisition, there are very important steps to take when beginning negotiations. With the right allocation of resources, along with these next steps, you will be able to successfully start the buying process:

• Determine teams, roles, and workflows on the buy-side
• Confirm with your team and lawyers that the target company does not have any hidden problems
• Start the negotiations
• Submit the issue-spotting report and use it to present the red flags to the other side of the negotiations
• Recommend a resolution (or resolutions), that your team has prepared in advance, to address the red flags
• If there is a serious issue found, request a detailed explanation and counter plan from the selling side

Steps to Take When the Merging Process is Complete

Even after you have successfully followed the checklist and purchased the target company, there are some check-points still left to consider such as:

• Integration of company policies and ethics and applying them on the newly purchased business
• Remediation of issues which were discovered during the due diligence
• Documentation of all the changes made from the start in order to make a clean and functional business

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