Effective due diligence process for an M&A transaction consists of legal, financial and strategic assessment and review of the seller side’s important documents, contracts and other details as to the company structure and operating history thereof, by the devoted financial, legal or strategic due diligence teams of the buyer’s side. Due diligence is in fact a reality check for the buyer to assess whether it makes sense to proceed with the deal or not since the factors represented that drive the deal may be unreal and illusory. In other words, a due diligence is the test to determine whether the matters underlying the deal are attractive inside as well as they are from outside.
Emotional state of the parties are also a significant factor driving an M&A transaction. As the revision of overwhelming contractual, technical or financial details may impede the due diligence process, it is most likely that the seller side will become even more defensive and impatient since they start to feel like their business organisation are under investigation. Thus, they may want to rush the process and give the buyer side a series of ultimatums on matters such as how uncomfortable they are with the due diligence process taking excessively long, they want the deal off therefore. Likewise, buyer side should resist the temptation to conduct a reckless due diligence in order to finish it quickly to save the resources and to please the seller side as they become more evasive and oversensitive. When the negotiations has reached this point, it’s best for the buyer side to rapid the process but with an improved focus on the details that really matters withnot being over paranoid on every little detail, avoiding turning the due diligence process into a fishing expedition, and accept the fact that due diligence does not have to be a perfect process where every little thing put in place at once so quick. The real sense of a due diligence requires shifting the focus from unnecessary details to the ones that really matters which can give the answers to real questions in order to reasonably ensure the buyer about legitimacy of the seller’s business. Parties all the times should keep in mind that checking whether the deal makes sense or not is not the only purpose of due diligence. It also helps the parties to decide when to call the deal off since the projected post-closing risks and liabilities may exceed buyer’s anticipations.
After all, due diligence process is a matter of deep background that provides the buyer side with the ability to determine what, when and how to ask things without disrupting the trust but with creating the necessary amount of fear atmosphere to keep the seller side committed to full disclosure upon things that matter. Having this approach employed, most potential risks will be revealed and ready to be assessed in order to find possible ways to resolve them before the closing, which will eventually led a deal to success- even a deal with a high potential of fail may be finished with success since the parties will have a chance to maintain negotiations upon how to fairly allocate risks in a way satisfying both parties.
Accordingly, since asking the right questions is one of the most important factors that drives a transaction to success, buyer should have comprehensive checklists that is customizable to specific type of transactions, with an aim to find answers to specific questions on hand in order to commence a thorough due diligence process with a methodic and systematic approach, allowing the document and data gathered to be attentively analyzed for a better on-point risk assessment upon matters such as seller’s obligations which the buyer will be expected to fulfil after the transaction as a successor, or what post-closing legal-commercial actions buyer is planning to take will require third party-government consent/approval/notification (i.e. contracts that cannot be transferred unless the counterparty approves). In other words, a thorough due diligence process not only helps to detect obligations but also helps to point the problems and post-closing challenges associated with them that may interrupt the post-merger integration.
For a due diligence checklist to serve its real purpose, it must be considered, and prepared accordingly, as a comprehensive guideline customized to specific needs of the seller’s business rather than being a set of standard questions since every type of business may have its own unique challenges, industry trends and other related details that one should be attentive about when embarking on a transaction. Once all the data gathered and identified under related topics with the help of a customized due diligence checklist, it is always possible to ask follow-up questions for additional data which has appeared to be important for the deal.
As a conclusion, an effective due diligence requires the commitment of both side’s teams towards a smooth transaction process, which will eventually lead to a deal-closing that can satisfy both side. Hiding a data or an information that needs to be disclosed will not do any good for the deal but it will lead to failed transaction or even more costly and time-consuming post-closing litigations. What needs to be done is to ensure the cooperation between the teams of both sides without disregarding the human element whose emotional state always has the risk to change the direction of the transaction.
Sherman, Andrew J. 2018. Mergers & Acquisitions From A To Z. 4th ed. American Management Association.
"Due Diligence - Overview Of Due Diligence In An M&A Transaction". 2020. Corporate Finance Institute. Accessed November 18. https://corporatefinanceinstitute.com/resources/knowledge/deals/due-diligence-overview/.