Due Diligence is the phase in Mergers & Acquisitions that refers to the investigation of a company by a seller after the Letter of Intent is issued.
It needs to be completed before the actual sale of the company is completed and the Sale Agreement is signed.
The trend is that the time for Due Diligence by a buyer is getting shorter and shorter.
In the old days, the due diligence phase could last up to 90 days, sometimes more. Now it usually is under 60 days. Sometimes even shorter.
What causes the most time in due diligence? What is the most costly part? What is looked at varies by acquisition, but verification of financial information presented by the seller is a key part.
Here are some tips for the buyer to finish due diligence as quickly as possible.
- Plan your diligence effort before you begin. In fact, consider what you want to look at in-depth before the Letter of Intent is issued.
- Use a Team. Buyers should have a team of experienced advisers who have worked on deals before. It is best if they know each other. The team can consist of both management and outside advisers.
- Speaking of outsiders, rely on them to provide the expertise that your management team does not have. Use environmental experts, valuation professionals, CPAs (accountants), tax advisors, and so on. The sooner these people are involved in the process, the better.
- For international acquisitions, make sure your advisers are experienced in the country where the acquisition target resides. This is important not just to be compliant with laws, but to understand the culture.
- The earlier due diligence starts, the better. Start conducting it even before the Letter of Intent (LOI) is accepted. In fact, much of the results of the buyer’s investigation should be reflected in the proposed pricing and deal structure contained in the LOI.
- For a buyer, investigate the management you will be inheriting with the company. Know them, and the pluses and minuses they may bring to the table.
- Be sensitive to potential surprises, especially the so-called “soft” issues, such as marketing issues, technology trends, and so on.
These are just a few of the issues you may encounter, each situation is different. I will write more about due diligence in a later post.
