The Art of Due Diligence - Part 2

The biggest fear for any buyer in an M&A transaction is purchasing a problem rather than a solution.

Getting started: How to prepare a business for M&A pre-deal

The biggest shock you, as a business owner, may find whilst undergoing the sale process is the number of documents an acquirer will demand during the due diligence phase. Potential buyers will want to fully and exhaustively vet every aspect of your business, from its physical assets to its intellectual property to the health and financial standing of your largest customers.

Business owners contemplating a sale must first understand, and then extensively document, exactly what is being offered to a potential partner. This must be done in a format that allows a potential acquirer an efficient way to review, understand and evaluate the target acquisition and decide if it offers opportunities that are important to its own corporate strategy.

In this critical pre-deal phase of an M&A event, you need to keep in mind six ‘big-picture’ questions any acquirer will ask – and, in turn, want answers to – as they examine a deal.

The six big-picture questions a potential investor will want to answer are:

1. Why does this company’s strategy, structure and standing in the market position it as an attractive buying opportunity?
2. What assets does this company have to help us achieve our own growth strategy? These assets include things like innovative technology, human capital and expertise, access to new markets, established customers, sales force, marketing or distribution pipeline, market dominance or positioning and attractive financial structure, among others.
3. Why would purchasing this particular company be a faster/ better way for us to move forward, given other options like buying a competitor or investing in organic growth?
4. What underlying factors in this option will provide us gains post-deal in both the short and long-term?
5. How will this company’s people and culture mesh with our own establishment and what benefits/ liabilities will we accrue by acquiring them?
6. Is this opportunity priced and structured right and is this particular deal the best way for us to pursue our strategy?

Pre-deal preparation that starts well in advance of any anticipated M&A event gives participants a chance to paint an attractive and accurate picture that will answer each of these questions thoroughly and, hopefully, entice buyers.

This preparation can start with management establishing a group of key stakeholders that will actively participate and produce the necessary company documentation to answer these questions in an effective and efficient way.

This group should include legal, accounting and finance professionals and may also require human resources, IT, Research & Development and other experts within the company. External experts at this stage may include investment bankers, legal advisors and other industry consultants.

The core group involved in pre-deal preparation, depending on their area of expertise, will need to find, prepare and ultimately deliver thousands of pieces of information, ranging from legal contracts to worker’s compensation packages to profiles for key staff.

Rigorous due diligence during the middle phase of M&A is designed to uncover potential problems that may be hidden in a company’s past.

If the selling company does not fully anticipate the scope of a formal due diligence review, it can lead to months of avoidable back-and-forth requests from a potential bidder to company management, demanding more and more documentation of past activities. This can put enormous strain on resources, not to mention risk of delays while the information is produced.

In the third blog, we will discuss best practices for classifying and producing due diligence.