The importance of due diligence to the success of a transaction is often underestimated. I thought it might be useful to put together a few pointers to keep in mind while running a due diligence exercise on a business you are intending to buy. There are a few good due diligence checklists around and a good booklet available to subscribers of the Business Sale Report entitled "Due Diligence - over 1000 Key Questions to Evaluate Any Business For Sale". You can download an extract here.
Plan it, scope it
Define the scope of the due diligence exercise and clearly mark out who is doing what, when. Work to a timeline. Don't waste time on areas that are not likely to cause any real issues or have any effect on the final sale agreement.
Employee issues
Thorough due diligence should pick up any issues, risks and potential liabilities relating to the seller's employees. For instance, check if there are any past or present employees litigating against the business. Do any of the employment contracts have unusual clauses i.e. over-the-top redundancy packages? What are the specifics of the pension plans?
Move fast, top down
It is important to spot any issues early on so that the appropriate warranties and indemnities can be quickly put in place. Focus on major issues first. As with any aspect of due diligence, the late uncovering of issues which lead to changed warranties and indemnities at an advanced stage can reduce strength of the negotiating hand and, (i.e. in the case of pensions) in some cases, even scupper the deal.
Communication is vital
The flow of communication between the buyer and his/her solicitors is of paramount importance, for if they do not work closely together, the process can quite simply fail.
Buyers must communicate the key issues of concern to the solicitors; they should not just assume that all areas are of equal importance, and that everything will be dealt with in good time. The solicitor must be told what the key commercial reasons are for the purchase, which areas are high-risk and which areas should be prioritised.
Continually monitor the activity of the solicitors and accountants carrying out your diligence and make sure they are giving you regular feedback.
Don't forget the culture
Funny how the lack of understanding of the target's company culture is one of the main reasons for failed acquisitions, yet has been notoriously ignored in the due diligence process. Don't make the same mistake. This is usually one for the purchaser's management to consider, rather than delegating to legal or financial advisers. Map out the management styles of your business and the target business. Look at the core values of each and analyse the differences. How do the communication structures and styles differ? Look at the dispute policies.
Collect information, then analyse
Don't let any of your advisers analyse whilst collecting the information. These are two distinct activities within the due diligence process. First find out where the required information is, then collect the information, recording its source and noting whether it is fact or hearsay. Then start an objective analysis.
Don't panic, take your time
A focused but comprehensive approach is better than taking shortcuts in order to reduce costs. Often the buyer discovers that "thin areas" of diligence need to be covered again in more detail. It will end up taking more time overall and costing more money.
See also:
The due diligence process for business buyers
Due diligence: a business seller’s perspective
More due diligence tips
Due diligence is essential during times of financial crisis
Due diligence in a recession
Also read: Intellectual Property in M&A – The key due diligence considerations
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