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
Data rooms are frequently used in M&A transactions and are an online, secure platform that allows the seller to update all documents required by an acquirer. It allows the seller to monitor access to documents down to the individual, restricting access particularly when sensitive documents have been uploaded to the data room such as those regarding IP.
Not only this, but a data room can provide useful intelligence on an acquirer’s activity, as it is trackable, so can help to determine interest levels. The data room can also provide insight into the acquirer’s area of focus, which prepares the seller for any questions that may arise later down the line, or can even help from a negotiation stance.
TIP THREE: DUE DILIGENCE IS DIFFERENT FOR EVERYONE
Depending on the potential acquirer brought to the table, they will have different due diligence needs. For example, an acquirer operating in the same sector as the seller may already be aware of the terms of contracts with certain suppliers, so will not place much onus on this area, but an investor with little knowledge of the sector will want to know more.
Understanding this from the outset can help in anticipating questions and needs, much like the data room, so can again help the seller prepare for any questions that may arise later.
TIP FOUR: ADDRESS AND RESOLVE POTENTIAL ISSUES
If potential issues are not dealt with prior to the due diligence stage, then an acquirer may chip away at the price offered or even pull out of the deal completely. One of the main areas that an acquirer will be looking at is whether the company is financially stable – preferably, a seller needs to show that sales, profit and cash are growing sustainably but if this is not possible, there needs to be some commentary on the resilience of the business, and direct the acquirer to where new growth can be created.
Other potential issues that need to be dealt with swiftly are liabilities – threats of litigation are a red flag for an acquirer and, if unresolved, will reduce deal value. Litigation needs to be dealt with before the due diligence process as it is much more difficult and costly to resolve once it has started.
TIP FIVE: USE CORPORATE ADVISERS
Corporate advisers help prepare the seller for a sale, directing them in terms of what is needed to get the company ready. This, of course, includes due diligence and because of the corporate adviser’s experience in dealing with transactions, they will know what to focus on and can help in such activities as providing a list of required documents in anticipation of the acquirer’s needs and can help support the seller in the identification and correction of issues in advance of the due diligence stage. Corporate advisers will also have access to other useful tools such as data rooms.
WE ARE READY WHEN YOU ARE.
Call Benchmark International today if you are interested in an exit or growth strategy or if you are interested in acquiring.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkCorporate.com
Europe: Carl Settle at +44 (0)161 359 4400 / Settle@BenchmarkCorporate.com
Africa: Anthony McCardle at +2721 300 2055 / McCardle@BenchmarkCorporate.com