MITIGATING RISKS THROUGH DUE DILIGENCE PRIOR TO AN ACQUISITION IN GHANA

MITIGATING RISKS THROUGH DUE DILIGENCE PRIOR TO AN ACQUISITION IN GHANA

Acquiring a company can be a transformative move for any business, offering opportunities for growth, diversification, and increased market share. However, the process comes with inherent risks that, if not managed effectively, can lead to significant financial losses and operational challenges.

One of the most effective ways to mitigate these risks is through thorough due diligence prior to and during the acquisition process.

Understanding Due Diligence

Due diligence in this context, is the process of investigating and evaluating a target company before finalizing the acquisition. It involves a comprehensive review of the company’s financials, operations, legal matters, and other critical areas. The main goal is to identify potential risks and liabilities, and ensure that the acquiring company makes an informed decision.

Steps to Effective Due Diligence

1. Assemble a Due Diligence Team: It is important to form a team of experts from various fields, including finance, legal, operations, and human resources. Each member of the team should have a clear understanding of their role and responsibilities in the due diligence process.
2. Develop a Due Diligence Checklist: Create a comprehensive checklist that covers all aspects of the target company and its operations. This ensures that no critical area is overlooked and helps in systematically gathering and analyzing information.
3. Conduct Interviews and Site Visits: Engage with the target company’s management and employees to gain insights into their operations and culture. Site visits can provide a firsthand look at the company’s facilities and operational processes.
4. Analyze and Report Findings: Compile the findings from the due diligence process into a detailed report. Highlight any risks, liabilities, and areas of concern. Provide recommendations on how to address these issues and mitigate risks.
5. Make an Informed Decision: Use the due diligence report to make a well-informed decision about the acquisition. Consider the identified risks and develop strategies to manage them effectively.

Key Areas of Due Diligence

A. Financial Analysis:

This involves a detailed examination of the target company’s financial statements, including balance sheets, income statements, and cash flow statements. The aim is to assess the company’s financial health, profitability, and any existing debts or liabilities. It is important to confirm the accuracy of the financial data and identify any red flags that could impact the acquisition.

A typical financial due-diligence checklist with respect to the target company may include the following:

• A review of audited financial statements for the past three to five years.
• Analysis of revenue streams and major customers.
• Examination of accounts receivable and payable.
• Assessment of existing debts and liabilities.
• Verification of tax filings and compliance by confirming Tax Clearance Certificate from the Ghana Revenue Authority (GRA), and a review of Value Added Tax (VAT), Pay-As-You-Earn (PAYE), and corporate tax filings.  
• Verification of existing and potential tax incentives including eligibility for exemptions (e.g., under Ghana Investment Promotion Centre (GIPC) Act, Free Zones, or relevant Association of Ghana Industries (AGI) initiatives).  
• Verification of compliance with Ghana’s Transfer Pricing Regulations, where applicable.
• Evaluation of financial projections and budgets.
  

B. Operational Review:

Understanding the target company’s operations is essential to determine how well it aligns with the acquiring company’s business model. This includes evaluating the company’s supply chain, production processes, where applicable, and overall efficiency. Identifying operational strengths and weaknesses can help in planning post-acquisition integration.

The operational due diligence checklist may include the following, where applicable:

• A review of the target company’s supply chain and logistics.
• Analysis of production processes and capacity.
• Examination of inventory levels and management.
• Assessment of IT systems and infrastructure.
• Evaluation of key operational metrics and performance indicators.
• Site visits to manufacturing facilities and offices.
  

C. Legal Examination:

Legal due diligence involves reviewing the target company’s contracts, intellectual property, litigation history, and compliance with regulations. It also involves checking industry-specific licenses e.g., Food and Drugs Authority (FDA), Environment Protection Agency (EPA), National Communication (NCA), Bank of Ghana (BOG) licenses for compliance. This helps in identifying any legal risks or potential disputes that could arise after the acquisition. It is also to ensure that the company is a legal entity per the laws of Ghana, has clear title to its assets and is not involved in any ongoing legal issues.

For the legal due diligence, the following checklist may be considered:

• Verification of incorporation or registration with the Office of the Registrar of Companies (ORC) and compliance with Ghana’s Company’s Act, 2019 (Act 992).
• Verification of constitutional documents such as the target company’s constitution or Memorandum & Articles of Association.  
• Review of corporate governance structure including Board of Directors’ Charter, shareholder agreements, changes in directorship, board minutes, and  board resolutions.  
• Review of all contracts and agreements, including customer and supplier contracts.
• Examination of intellectual property rights and registrations.
• Review of IT infrastructure and data protection compliance (under Ghana’s Data Protection Act, 2012).  
• Assessment of any ongoing or potential litigation.
• Verification of regulatory compliance and licenses.
• Review of employment agreements and labor relations.
• Analysis of environmental and safety compliance processes including environmental compliance with respect to Environmental Protection Agency (EPA) permits.

Sector-Specific Checklist

• Mining/Oil & Gas: Check Ghana’s Mineral Commission or Petroleum Commission approvals.  
• Banking/Finance: Verify Bank of Ghana (BOG) requirements and licensing.  
• Agribusiness: Assess land ownership and export restrictions
• Real Estate and other land-related ventures: Confirm validity of land titles at the Ghana’s Lands Commission and also check for encumbrances (mortgages, litigation, or government acquisitions etc).  
  

D. Market and Competitive Analysis:

Assessing the target company’s position in the market and its competitive landscape is vital. This includes analyzing market trends, customer base, and competitors. Understanding the company’s market share and growth potential can provide insights into the strategic value of the acquisition.

A market and competitive due diligence checklist may include the following:

• Analysis of market trends and industry dynamics.
• Assessment of the target company’s market share and competitive position.
• Review of customer demographics and buying behavior.
• Examination of key competitors and their strengths and weaknesses.
• Evaluation of potential market opportunities and threats.
• Analysis of the target company’s marketing and sales strategies.
  

E. Human Resources Evaluation:

The workforce is a key asset in any acquisition. Evaluating the target company’s human resources, including employee contracts, benefits, and organizational structure, and potential redundancy risks is important. Identifying key personnel and understanding the company culture can aid in smooth integration and retention of talent.

A checklist for the human resources due diligence may include

• Review of organizational structure and key personnel.
• Examination of employee contracts, benefits, and compensation, pension (Tier 2 & 3), and Social Security and National Insurance Trust (SSNIT) compliance.  
• Assessment of employee turnover and retention rates.
• Evaluation of company culture and employee satisfaction.
• Analysis of training and development programs.
• Review of any labor disputes or issues.
• Assess potential severance costs if restructuring is planned.  
  

Conclusion

Due diligence is a critical step in the acquisition process that helps mitigate risks and ensure a successful transaction. By thoroughly investigating the target company, identifying potential issues, and developing strategies to address them, businesses can make informed decisions and achieve their acquisition goals with confidence.

At August Law, our team of lawyers and industry consultants expertly facilitate transactions, ensuring the protection of our clients’ business interests. We mitigate risks, help achieve strategic goals, and ensure compliance with all applicable laws and regulations.

Consult us today for exceptional legal representation with integrity, compassion, and unwavering dedication.