Discovering the Potholes of Deals
The buyer’s due diligence process deals with the legal, financial and strategic reviews of all of the seller’s documents, contractual relationships, operating history and organizational structure. Due diligence is a process and a test of the value proposition underlying the transaction to insure that the buyer’s company meets the expectations created before the signing of the Letter of Intent.
Effective due diligence and planning starts with a standard comprehensive due diligence checklist; however, it must include the buyer developing questions regarding issues and problems pertaining to the seller’s business. The buyer must identify the potential risk in the acquiring company and investigate.
The due diligence work is divided between two efforts:
- Financial and strategic due diligence focuses on the confirmation of past financial performance of the seller; synergies and economies of scale to be achieved by the acquisition; integration of the human and financial resources of the two companies; and collection of information necessary for financing deals.
- Legal due diligence focuses on the legal issues and problems that may serve as impediments to the transaction; how the transaction should be structured; and the contents of the transaction documents, representations and warranties.
Sometimes the best deals you make are the ones you don’t make.