M&A Series – Due Diligence

Due diligence –it’s a strange phrase. If you have you ever stopped to wonder what it’s true meaning is (probably not) then Wikipedia tells us it is “required carefulness or “reasonable care”. In the context of buying or investing in a business, when “caveat emptor” (“buyer beware”) is more relevant than ever, perhaps this sounds a bit too light. Extreme care may be more relevant.

Due diligence (“DD)” is all about protecting yourself as the buyer and making yourself comfortable that what you ARE acquiring is what you THINK you are acquiring.  The official process usually starts after an offer has been accepted by the seller and you have a Heads of Terms document outlining the key terms, and, hopefully, a period of exclusivity for you to undertake the DD. Tip: don’t forget that your DD ACTUALLY starts from the very first moment you start interacting with a potential target company. From the moment you see their website or visit their site to when you first meet the seller, you should continuously be assessing in your mind whether the story stacks up. Do you get consistent answers from different people? Does it make sense? Does it feel right?

Remember, in the smaller deals (in which we are typically dealing with) the DD can be more weighted towards the more non-tangible aspects (culture of the company, your gut-feel etc) compared to larger deals which will be more determined by facts and figures (notwithstanding culture is always a major determinant of any M&A success).

But you can’t and shouldn’t, avoid the nitty gritty of DD which is a crucial process to go through.  I won’t add to the internet’s long list of DD lists, but of course this must cover legal, financial, commercial, and operational matters.  Tip: always use professionals to assist you, particularly with any legal and financial DD.

What next? Hopefully you find that the business you thought you were buying is exactly that. If you find things in DD that give you cause for concern but aren’t deal breakers, then this is potentially an opportunity to re-negotiate with the seller. Tip: remember, when you buy the company (particularly if you are structuring it as a share purchase rather than an asset purchase) you can put warranties, indemnities and covenants in place with the seller to protect yourself.

DD is a really crucial part of the process. Personally I think it’s an enjoyable part – you are getting under the skin of the potential target and investigating it’s potential. Tip: don’t be blinded by your desire to do the deal – this is your chance to dodge any future bullets!