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Due
Diligence Execution Templates
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| Due Diligence Data Room Contents | |
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FREE SAMPLE Valuation Model I |
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| Valuation Model II | |
| Valuation Model III |
Human Resources Critical Issues
Human Resources Extensive Checklist
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FREE SAMPLE Human Resources Abbreviated Checklist |
Organization Culture Audit - Simple Version
Organization Culture Audit - Extensive Version
Financial Information Checklist
Professional Services Checklist
Top Checkpoints For Distressed Businesses
Post Merger Integration Templates
Mergers & Acquisitions Templates
Due
diligence is used to investigate and evaluate a business opportunity.
The term due diligence describes a general duty to exercise care in any
transaction. As such, it spans investigation into all relevant aspects
of the past, present, and predictable future of the business of a target
company. Due diligence sounds impressive but ultimately it translates
into basic commonsense success factors such as "thinking things
through" and "doing your homework".
Why
is Due Diligence Conducted?
There
are many reasons for conducting due diligence, including the following:
- Confirmation
that the business is what it appears to be;
- Identify
potential "deal killer" defects in the target and avoid a
bad business
transaction;
- Gain
information that will be useful for valuing
assets, defining
representations and warranties, and/or negotiating price
concessions; and
- Verification
that the transaction complies with investment or acquisition
criteria.
Lead
and co-investors, corporate development staff, attorneys, accountants,
investment bankers, loan officers and other professionals involved in a
transaction may have a need or an obligation to conduct independent due
diligence. Target management typically assists these parties in
obtaining due diligence information but because it is unwise to totally
rely on management third party consultants such as Astute Diligence are
often brought in to conduct due diligence.
When
is Due Diligence Conducted?
Initial
data collection and evaluation commences when a business opportunity
first arises and continues throughout the talks. Thorough detailed due
diligence is typically conducted after the parties involved in a
proposed transaction have agreed in principle that a deal should be
pursued and after a preliminary understanding has been reached, but
prior to the signing of a binding contract.
How
is Due Diligence Conducted?
The
parties conducting due diligence generally create a checklist of needed
information. Management of the target company prepares some of the
information. Financial statements, business plans and other documents
are reviewed. In addition, interviews and site visits are conducted.
Finally, thorough research is conducted with external sources --
including customers, suppliers, industry experts, trade organizations,
market research firms, and others.
How
Much Due Diligence Needs to Be Conducted?
There
is no correct answer to this question. The amount of due diligence you
conduct is based on many factors, including prior experiences, the size
of the transaction, the likelihood of closing a transaction, tolerance
for risk, time constraints, cost factors, and resource availability. It
is impossible to learn everything about a business but it is important
to learn enough such that you lower your risks to the appropriate level
and make good, informed business decisions.
Can
I Overdo My Due Diligence Effort?
Yes.
Too much due diligence can offend a target company to the point where
they walk away from a deal. It can also result in "analysis
paralysis" that prevents you from completing a transaction or
provides time for a better competing offer to emerge. Accordingly, it is
important that due diligence be prioritized and executed expeditiously.
Appropriate investigation and verification into the most important
issues often must be balanced by a sensible level of trust concerning
lesser issues.
How
Much Time is Allocated for Due Diligence Completion?
Time
allocated for completion can vary widely with each situation. Many
preliminary agreements define the timeframes in which due diligence will
be conducted. Time schedules through the closing of a transaction are
typically tight -- parties should ensure that adequate time is allocated
to due diligence.
How
Should I Prioritize Tasks Within the Due Diligence Effort?
Every
transaction will have different due diligence priorities. For example,
if the main reason you are acquiring a company is to get access to a new
product they are developing to accelerate your own time to market, then
the highest priority task is to ensure that the product is near
completion, that there are no major obstacles to completion, and that
the end product will meet your business objectives. In another
transaction, the highest priority might be to ensure that a major
lawsuit is going to be resolved to your satisfaction.
How
Much Does Due Diligence Cost? Who Pays for It?
Due
diligence costs are based on the scope and duration of the effort, which
in turn are dependent on the complexity of the target business and other
factors. Costs are typically viewed as an essential expense far
outweighed by the anticipated benefits and the downside risks of failing
to conduct adequate due diligence. The involved parties determine who
will bear due diligence expense.
How
Do You Maintain Confidentiality During a Due Diligence Engagement?
Certain
activities conducted during due diligence can breach confidentiality
that a transaction is being contemplated. For example, contacting a
customer to assess their satisfaction with the target company's products
might result in a rumor spreading that the company is up for sale.
Accordingly, to maintain confidentiality, we often contact customers
under the guise of being a prospective customer, journalist, or industry
analyst.
Does
Due Diligence Ensure that a Business Transaction Will Be Successful?
A
well-run due diligence program cannot guarantee that a business
transaction will be successful. It can only improve the odds. Risk
cannot be totally eliminated through due diligence and success can never
be guaranteed.
Can
I Be Sued for Failing to Conduct Adequate Due Diligence?
In
this litigious world, you can be sued for just about anything and
failing to conduct due diligence is no exception. Parties involved in a
business transaction may find themselves being sued by their clients,
investors, customers, employees, suppliers, or other third parties
asserting failure to conduct proper due diligence or pursuing a
liability that was overlooked or incorrectly assessed by due diligence.
Can
Using a Due Diligence Consultant Ensure that I Will Not Be Sued?
No.
However, conducting proper due diligence may serve as a strong legal
defense to third-party claims after a transaction closes. Due diligence
may also reduce legal issues by alerting a purchaser or investor to
potential liabilities that can be mitigated in various ways prior to
closing the transaction.
