What is Due Diligence?
Due diligence is the task of verification, investigation, or audit of a possible deal or investment opportunity. It’s used to confirm all pertinent facts and financial information and to substantiate anything else that was brought up during an M&A offer or the investment process. Due diligence must be complete before a deal closes so that the buyer has an assurance of what they are purchasing.
Due diligence necessitates tracking down enough information about the company at hand that the purchasing party can make a sound decision about a merger with open eyes. The due diligence process also includes looking for risks in the company’s contracts.
Preparing for Due Diligence
Attorneys and industry experts alike agree that the sooner the due diligence phase of an M&A transaction can begin, the better. The parties can start by drafting a comprehensive checklist of all the documents necessary on both sides of the transaction. Then coordinate who is responsible for each element of due diligence.
Documents required for due diligence can vary depending on the type of transaction. Generally, you should expect some documents from each of the following document categories:
- Legal due diligence
- Financial due diligence
- Sales and marketing due diligence
- Human resources due diligence
- PP&E due diligence
- Contract due diligence
- Intellectual property due diligence
- Company’s Good Standing and Organization Due Diligence Document
Today, most due diligence uses a virtual document room of sorts. This helps keep all documents and resources in one place and accessible to those who need to access them. If done correctly, it will also help ensure confidentiality.
Due diligence allows investors and organizations to understand:
- The specific nature of a deal
- The risks involved
- If the deal fits in with their desired portfolio
Undergoing due diligence is comparable to doing “homework” on a potential deal. You can’t make informed investment decisions without completing due diligence.
Due Diligence Short Cuts, Mistakes, and Miscommunications
Don’t take shortcuts when it comes to your company’s role in due diligence. The buying company needs, and has the right, to learn everything about the other business. They shouldn’t just stop at knowing their outer surface. As the buyer digs into the sometimes-forgotten corners of the records, they may find information that increase the costs or reduce the value of the M&A. Companies need to get all the facts, both good and bad, on the table before weighing the pros and cons so that they can make their final decision.
Suppose miscommunications arise overdue diligence issues or one party makes a mistake or an omission. In that case, the deal can quickly go south. The buying company needs to feel like they can trust the selling company and that they know all there is to learn about them—the positive, negative, and everything in between.
When researching due diligence failures, you’ll find the same 10 to 15 deals mentioned repeatedly: Nextel and Sprint, Quaker Oats and Snapple, and Daimler and Chrysler, just to name a few. Yet, there are so few due diligence failures cited in such a large industry involving tens of trillions of dollars. Of course, this doesn’t necessarily portray the truth.
Why would a company want to admit a due diligence failure if they could blame other issues such as slow integration, culture issues, or complex market environments? While business owners can blame M&A failures on whatever they like, it won’t change the truth about why they fail. The truth is that complete due diligence might have identified these matters before the transaction had even reached the negotiation phase.
The due diligence process is necessary, especially one enhanced by a virtual data room. Business owners and managers considering an M&A transaction should ensure that it’s an integral part of the process. Creating value for a business is typically the reason for M&A, and proper due diligence will maximize the results.
Hackstaff Snow Atkinson & Griess: The M&A Attorneys You Need
During M&A, you need a highly experienced M&A attorney who can thoroughly review all the essential due diligence items. As seasoned business attorneys, we know how to handle due diligence and any issues arising from it. We are by your side every step of the way, helping you meet your business goals while still protecting your assets. Give our office a call today to learn more about how we can help with your M&A.
