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What is included in the M&A due diligence?

The due diligence process is one of the final steps in an M&A transaction where the potential buyer does its obligation to best confirm and verify the seller's company data and relevant information. This information typically includes but not limited to: financials, IT, operations, legal & compliance, insurance, corporate bylaws, contracts, customers, among other important information. Typically, the due diligence process follows the execution of a letter of intent (LOI), a non-binding document outlining the intent of both parties to commit to the transaction.

Once the LOI has been executed, the buyer will request a list of items to be shared by the seller with the intention of disclosing the selling company’s key details that could uncover risk buyer. As mentioned before, items can range all the way from financials to operations to insurance to contracts, among others. In cases where the seller owns the real estate, additional documents pertaining to the real estate, such as: deeds, mortgages, tax documents, owners’ insurance, etc. will need to be provided. Given today’s advancements in technology, once the due diligence request list has been sent to the seller, the team leading the deal will proceed to open what we call in the M&A world a “virtual data room” or a “data room.” These two terms are referred to as online portals that hold and store the information requested by the buyer with high levels of security only available for certain parties, including: buyer, seller, M&A attorneys, CPAs, advisors, among others. The data room allows activity within the room to be tracked and archived so there is a file of the information exchange after closing should any issues arise.

Once the due diligence starts, it is highly recommended for the buyer to hold, at the very least, weekly meetings or calls with the seller to discuss outstanding items or any questions that may have arisen from the process. As the due diligence process progresses, the buyer will become more familiar with the seller’s company. For an instance, should the buyer find any items that may play against the seller in the due diligence process, the buyer may use this to lower the valuation of the business which may ultimately result in a lower offer price.

In addition, this process can result as a discovery of potential opportunity to better structure the deal, find real synergies among parties, review any benefits and challenges for potential system integrations, and any associated risks that may arise from the result of this potential acquisition. 

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Top Tips to be Due Diligence Ready

It is imperative that during an M&A transaction thorough due diligence is conducted, not least because it helps to establish the true value of a transaction.

Due diligence is a term applied to the work acquirers undertake after signing HoTs (Heads of Terms) and falls into three main categories: commercial due diligence, financial due diligence and legal due diligence. It is a review of the seller’s company and includes looking into areas such as potential risks and liabilities, the seller’s competition, middle management and employees, financial status, intellectual property, and assets.

It is not an easy task to conduct, so here are five tips on how to ease the process:

TIP ONE: IT’S NEVER TOO EARLY TO PREPARE

An acquirer will want to see an extensive list of documentation which can include copies of contracts with suppliers, intellectual property registration, computer systems and data protection, employment contracts and pensions, and much more.

It is wise to draw up a due diligence checklist anticipating what an acquirer will want to know – most will provide this when the time comes but a checklist early on ensures that these documents are prepared and up-to-date.

Being prepared with this information, before an exit is even on the cards, is important as it can help expedite the transaction and make the company look more attractive to potential acquirers – if information can be provided quickly, an acquirer will know the transaction is being taken seriously.


TIP TWO: USE A DATA ROOM

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Due Diligence – How it can be your Foe, but should be your Friend

Posted on March 6, 2018 By in Experts + Due Diligence
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Due Diligence in Mergers and Acquisitions: A Beginner’s Guide to the Top Five Areas of Interest

Due diligence by potential buyers takes up a serious amount of time in any M&A process. Essentially, it’s designed to make sure the buyer knows exactly what it is that they’re buying – and in other cases, ‘reverse diligence’ helps the target company understand whether a potential buyer or merger partner is right for them.

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