Depending on the nature of the transaction, both the buyer and the seller will perform due diligence procedures, but clearly, the burden is much greater for the buyer.
By the time formal due diligence procedures commence, the acquirer or the investor has spent a considerable amount of time, energy and other resources in identifying the target, analyzing strategic considerations, formulating a high-level integration plan and arranging for financing. Oftentimes the information available in the public domain relating to the target is limited, especially if the target is a private company.
The due diligence process enables the buyer to see firsthand the operation of the target and obtain access to key employees, as well as additional financial and other records.
Since acquisitions can be risky, it is paramount that adequate time is allowed and the findings be utilized not only to finalize the integration plan and financing needs, but also to renegotiate certain aspects of the purchase price or other provisions of the purchase agreement.
The result of this process should give the buyer a degree of comfort that the original objective and reasons for pursuing the acquisition will be achieved. Alternatively, in some instances, the results of due diligence can identify issues that fall into the deal-breaker category.
If the transaction is being structured as an asset purchase with no liabilities being assumed, your focus will be to look at the nature and value of the assets being acquired. You will also look at the liabilities, but that review will be primarily to understand the nature of the business and assist in the formulation of the integration plan.
If the transaction is being structured as a purchase of common stock, you will still look at the assets, but will need to understand the liabilities of the company, including income taxes and contingencies, as those liabilities will be the responsibility of the purchaser unless specifically dealt with in the purchase agreement. Also critical is the assessment of the projections represented by the seller.
A point person should be identified so the results of the procedures being performed by the due diligence team can be accumulated by one person. Depending on the size and complexity of the transaction, a team of people from the acquirer might be more appropriate. The outside professionals will include, at a minimum, the attorney who has been assisting the acquirer with the negotiations and purchase agreement, as well as the company's outside accountants.
Depending on the complexity of the industry in which the target company operates or the risks associated with the assets or liabilities being acquired, individuals with specific specialties should be considered.
It is extremely important to identify critical risk areas associated with the transaction prior to the commencement of due diligence. In this manner, the team from the company and the outside professionals will be focused, which will reduce the likelihood of unnecessary procedures being performed and result in lower deal costs.
The following are some of the benefits you should expect from a properly planned and executed due diligence project. This list is not meant to be all-inclusive and will vary on a deal by deal basis.
* Validation of the original strategic acquisition assumptions
* Validation of the critical financial assumptions
* Validation that financing associated with the acquisition is adequate
* Identification of integration issues
* Potential renegotiation points to be considered
* An understanding of the quality of the employee base
* An understanding of the condition of the assets being acquired
Due diligence is not an insurance policy that will guarantee the successful integration and operation of an acquired company, but the chances of a good fit are much higher if the proper procedures are followed.
Sheldon Zimmerman (firstname.lastname@example.org) is a principal with Tauber & Balser P.C. in the Forensic Accounting & Litigation Services Group. With more than 30 years of professional experience, he has advised on mergers and acquisition, due diligence matters, fraud investigations and accounting irregularities.