One of the most overlooked and poorly executed aspects of any Merger & Acquisition (M&A) or restructuring transaction is due diligence. Transactions are frequently penciled out on paper, financial models are run, and high-level strategic discussions are held. Yet, often, little attention is paid to the validation of the underpinnings of the deal thorough sound due diligence.
Due diligence not only serves to unearth potential problems in a transaction, it also validates one’s thinking and provides a roadmap for ensuring that post-transaction follow-up is well executed. Due diligence is the methodical investigation of all the legal, financial and strategic facets of the company and a transaction. It is a process that involves obtaining and verifying very detailed information about a company that is not usually found in its public documents.
Companies, bankers, accountants, lawyers and consultants perform due diligence for a variety of reasons. However, in concept, due diligence has three (3) central purposes.
- Validate Transaction Assumptions – Initial deal assumptions are often based on public information. Due diligence allows an acquiring company to verify the initial assumptions based on confidential discussions and documents.
- Unearth Possible Problems – In the course of validating initial assumptions, by digging into a company’s legal and financial framework, and by challenging strategic assumptions, it is often possible to identify errors, omissions or factual misrepresentations. In addition, there may be items not previously disclosed that are material to the transaction.
- Plan for Transition – Based on the in-depth knowledge gained from the due diligence exercise, it is possible to craft a detailed transition plan that ensures the assumptions in the transaction are seen to fruition, manages any problems that have arisen in the course of the due diligence, and integrates the companies or ensures the successful conclusion to the transaction.
Due diligence also provides a board of directors and management a measure of security that they have protected shareholder’s interests by diligently evaluating a proposed transaction. Essentially, once a transaction has reached the point where it appears likely the deal may be consummated, due diligence will either confirm that the transaction should proceed on the terms discussed, or indicate that the parties should restructure the transaction or part ways. Due diligence is necessary to protect the company from liability. Without having conducted proper, thorough due diligence, the board of directors could be found to have been negligent in its efforts when undertaking the transaction.