Due diligence is both an art and a science, and it is a process, not an event. Today, due diligence in mergers and acquisitions (M&A) transactions is a creative and strategic approach and not a mechanical methodology. It requires a deep knowledge of the history, values, mission, culture and intangible assets of the Seller’s company. The due diligence process involves reviewing and confirming the Seller’s documents, contractual relationships, financial data, operating history, and legal structure. In other words, due diligence requires a legal, financial and strategic review of the Seller’s company. Through due diligence the Buyer can avoid closing an M&A deal that is operationally, financially, strategically or otherwise imprudent.
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The goal of any due diligence in a merger and acquisition transaction is to be a cooperative and patient process involving equally both the Buyer and the Seller. It should be a two-way street where both the Buyer and the Seller have the opportunity to gather background information about each other.
In terms of planning the due diligence, the Seller is responsible for organizing all the necessary documents and preparing the data room. Today, the Seller and the Buyer typically use electronic data rooms to share pertinent information necessary for an M&A deal. The electronic data rooms are particularly important to cross-border merger and acquisition transactions. Returning to planning due diligence, the Buyer is responsible for conducting a detailed analysis of the documents provided by the Seller, preparing to ask the Seller all the pertinent questions and to conduct interviews with the Seller’s team.
In a merger and acquisition due diligence, the best way for the Buyer to ensure that that no critical information slipped through the cracks is through effective due diligence preparation and planning.
It is recommended that Buyers employ comprehensive due diligence checklists that guide the Buyer’s management team through the process while it works with the lawyers to gather and review all the documents relevant to the M&A transaction. In addition, the Buyer is advised to use checklists in order to assess the legal risks and liabilities after the closing and to identify any consent, approvals and notifications that may be required from third parties including government agencies. Typically, third-party consent is required when existing contracts, permits and licenses cannot be assigned or transferred without the counterparty’s prior approval.
The Buyer’s due diligence checklist should be used for guideline purposes only and the Buyer should develop questions related to the nature of the Sellers’ business activities. The Buyer should use the checklist to set the pace for the level of detail and adequacy of the review.
However, it is important to point out that every business is different, and every type of business has its issues and problems such that the Buyer should not rely on a standard set of questions and checklists. Standard checklists are rarely sufficient.
In terms of conducting due diligence, when it is done correctly due diligence is performed in multiple stages. First, the Seller and the Buyer gather the basic data and identify specific topics of interest. Subsequently, the parties identify follow-up questions and gather additional data. The follow-up questions, data gathering and the specific topics must be tailored to the Seller’s core business and adapted to the particular industry trends and challenges.
Finally, once the Buyer is reasonably assured that the Seller’s claims about the business are legitimate and fair, the Buyer clears due diligence and the acquisition or merger agreement follows.
The parties to mergers and acquisitions deals should follow best practices for due diligence to avoid joining the ranks of failed M&A transactions. We use our skill and expertise and engage financial advisors to plan and conduct both legal and financial M&A due diligence. Contact us, your Florida corporate lawyer to assist you with planning and conducting due diligence in an M&A transaction.