Due diligence preparation is vital – here’s what to expect and the key areas of investigation

By Gabriela Silvestris, Director, Equiteq

A no-surprises and smooth due diligence (DD) process underpins every successful deal, closed on the terms agreed before exclusivity. Ideally confirmatory in nature rather than a voyage of discovery, DD provides comfort to the potential acquirer and helps the vendor agree a better set of share purchase agreement warranties and indemnities. On the flip side, material surprises can lead to adverse re-negotiations and a drawn-out process can be distracting and lead to financial under performance.

There is a golden rule in M&A: issues will fill the available time. Being well prepared and due diligence ready is key to driving a fast completion process, protecting value and shoring up buyers’ confidence.

In some jurisdictions, commissioning vendor due diligence is quite common. It enables sellers to manage the timetable, better prepare for buyer due diligence and by disclosing reports to the final shortlisted parties, mitigates issues while there is competitive tension in the sale process. As ever, the benefits need to be weighed against the costs.

As all transactions are unique, the scope and specifics of the buyer’s DD process are tailored to each deal. Nevertheless, certain key areas of investigation are common to most processes and include:

  • Legal DD. The acquirer’s solicitors will run a comprehensive assessment of ownership, authorizations, legal compliance and risks. It’s important that responses to enquiries are carefully tracked for disclosure purposes.
  • Financial DD. The acquirer’s accountants will investigate the target company’s financial affairs and assess the reasonableness of projections and EBITDA adjustments. They also form an opinion on net cash/debt and normalised working capital, which are items that require careful negotiation when determining final value of the shares.
  • Tax DD. The potential acquirer’s tax advisors will conduct an exhaustive analysis and review of the target company’s tax affairs – both to find price reductions but also compliance risks. A company’s tax liability becomes the reference point for a tax indemnity in the share purchase agreement.
  • Operational DD. Frequently carried out by the potential acquirer itself, or by advisers on behalf of private equity, this assesses synergies, operational risks and opportunities.
  • Commercial DD. Carried out by the potential acquirer, or advisers on behalf of private equity or buyers entering new markets, this considers market size, growth, competitive positioning and client referencing. Prior commissioning of independent client surveys can help diminish the scope of due diligence in this sensitive area.
  • Technology DD. The potential acquirer’s CTO, or advisers on behalf of private equity, would ordinarily review and evaluate the target company’s current technology and IT architecture, while lawyers will verify ownership of registrable IP.
  • Management DD. Very common in private equity situations, buyers will check senior leaders’ background and suitability.

Investing in transaction readiness and a central resource to deal with the process will payback handsomely.

With M&A teams in New York, London, Singapore and Sydney, Equiteq supports clients during their equity growth journey, preparing them for an M&A transaction and teeing up successful M&A processes to close the best possible deals.

If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.

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