DUE DILIGENCE: BEGIN WITH THE END IN MIND

Confirmatory (final) due diligence in M&A transactions begins following the execution of the Letter of Intent (LOI) and should be completed when the Definitive Agreement is signed; normally, 60 days. The buyer’s purpose in due diligence is to ensure that the Target Company meets the expectations created in the selling memorandum. This process examines the issues of:

• Financial – verification of the Target’s actual financial performance; problems with slow moving inventories, aging receivables, pensions and post-employment obligations.
• Legal – review of all contractual relationships; indemnification limits, escrow agreements, seller representations and warrants incorporated in the definitive sales agreement.
• Operational – meetings with key employees and significant customers; review of the Company’s technologies, processes, accounting systems and fixed assets.

The scope of todays due diligence process has expanded to reach deeper and wider than ever before. “Surprise” should be the expectation before closing; with buyers wanting to renegotiate the selling price, require additional conditions or to walk away. A knowledgeable M&A professional will have the correct selling plan in place from the start with potential due diligence issues addressed or disclosed long before the execution of the LOI.