THE DUE DILIGENCE PROCESS. CHALLENGES & SOLUTIONS!

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November 27, 2018

BACKGROUND

The due diligence process is the key element of any business exit, as invariably the whole process will stand or fall based on the outcome(s) of the exercise.

Also irrespective of the size of any transaction or the sector involved, where a third party is investing into your business or indeed acquiring your business, you can be guaranteed that there will be a due diligence process involved!

 

DUE DILIGENCE – WHAT IS IT?

Due diligence can therefore be defined as: 1. an investigation into the affairs of a company prior to it’s acquisition, disposal, re financing… or other similar transaction 2. a bridge that must be crossed in nearly all transactions and without it, the risk of problems or failure along the journey (for the buyer) are increased

‘’The aim of due diligence is to enhance a user’s understanding of key information underpinning a corporate transaction enhancing the parties’ ability to make informed investment decisions”

TIMELINES

Due diligence commences only once there have been positive initial discussions, which lead to a broad agreement between the parties on the key issues i.e. Heads of Agreement

  1. Third Party Approach
  2. Initial Discussions
  3.  Heads of Agreement
  4.  Due Diligence
  5. Renegotiation/Warranties/Indemnities
  6. Purchase and Sale Agreement

CHARACTERISTICS OF THE DUE DILIGENCE PROCESS

There are a number of unique characteristics applicable to due diligence, which are not typically experienced by business owners during other business transactions or projects.

  1. Generally time driven : once the Heads of Agreement have been agreed upon, the buyer usually has a short period of exclusivity to fully investigate your business, meaning that what follows can be an intense and stressful period responding to queries and providing the relevant data/information
  2. Significant involvement of finance team and senior management : the due diligence process will add significant additional workload onto both finance staff and the senior management of the business, hence the risk of ‘taking your eye off the day the day activities’
  3.  Purpose of the process is risk management : as the party looking to exit (the seller) it is important for you to understand the purpose of the process i.e. it is predominantly for the buyer to investigate all of the potential risks in your business PLUS be able to validate the opportunities
  4. Largely out of YOUR control : as per the above, the process is largely outside of your control, however there are elements of the process that you can manage proactively, such as ensuring that the opportunities for the buyer are constantly highlighted, while being supported by the financial and other data being provided along the way
  5. Inadequate due diligence = RISK : there is risk for both parties where the due diligence process is not managed inadequately i.e. for the buyer that a key risk or a potential opportunity is not clearly investigated ahead of the completion of the deal, while for the seller poor management of the process results in a lack of credibility, errors or delays i.e. affecting deal completion or price.

 

THE PROCESS ITSELF

Although every transaction can be different in size and nature, the process itself typically consists of the following elements

  1.  Financial due diligence
  2.  Commercial due diligence
  3.  Operational due diligence
  4.  Legal due diligence