Welcome to the finance storyteller series!
This video covers 10 tips for a solid due diligence in a merger and acquisition setting.
First of all: take it seriously!
A due diligence is much like the process you would go through when buying a house: the
seller has an obligation to disclose significant items related to the condition and history
of the property, and it's the buyer's responsibility to be completely aware of past problems before
signing on the dotted line.
Be aware that a due diligence isn't just a quick "check the boxes" exercise in between
the deal negotiation and the official deal signing.
If the outcome of the due diligence is not satisfactory, it may lead to cancellation
of the deal!
On the flipside, be careful not to get carried away with insignificant items.
We are looking for material risks, and want to see things in the right perspective.
Due diligence is resource constrained and time sensitive by definition.
How many people should you have on the due diligence team?
How much time do you plan for it?
Be aware that a due diligence is very hard work both for the team on the buyer's side as
well as the team on the seller's side.
If you "overdo" it, the due diligence might get in the way of normal business operations.
On the other hand, if you don't assign sufficient time and resources, you may not get the quality
you need.
Assess the size and complexity of the business before you decide on team size and duration
of the due diligence.
Put together a diverse team!
Every person has their own perspective on the world.
In a due diligence, you need to look at things from as many perspectives as you can, to capture
as many insights as possible.
So make sure you put together a diverse team, in age, gender, and functional background.
Don't leave the due diligence just to the finance team or the legal team, but make sure
you also have commercial, technical, IT, operations, logistics, manufacturing, sourcing and HR
experts involved, depending on the nature of the business you are investigating.
Another thing to consider here is what the stakes are for each member in the team: do
they stand to gain or lose from the deal, financially or careerwise?
That could impact their judgment!
You want to select team members that are as objective as possible, and probably need some
independent external 3rd party team members for balance and credibility.
Confidentiality... a due diligence is an intense project, probably with long hours at all kinds
of locations, including planes and trains, overheated conference rooms, and possibly
the local Starbucks.
Be careful when discussing your due diligence!
If you need to have a confidential discussion, do it at a safe location.
Always use the codename for the acquisition target, and make sure you come up with one
that is not too obvious or too common!
You won't be the first team that ever does a due diligence, so build on the expertise
of others that have gone before you.
There are generic checklists out there, as well as industry-specific ones.
Do consider that the company you are investigating is unique, and you need to brainstorm with
your team what the risk areas are.
A useful tool for this is something called the Failure Modes Effects Analysis, from the
world of project management and six sigma.
You brainstorm "worst case scenarios", things that could go terribly wrong, and rate them
on impact as well as likelihood.
That helps you to prioritize the areas to investigate.
After the site visits, document reviews and interviews are done, take your time to write
a comprehensive report of your due diligence findings.
Upfront, you need an executive summary which, if the due diligence went well, includes a
statement like "in our opinion, based on the review conducted, we did not find any material
defects or risks that prevent the transaction".
Show how you have come to this conclusion.
In your detailed findings, list your sources, crossreference your documents, list who you
spoke to and when you spoke to them.
Be as factual as you can.
As an aside: version control is key in writing the report, you might easily get up to version
20!
Like in any business setting, communication is key!
Lots of people will want an update from the team on the progress.
Don't let this distract you too much from getting the work done.
It's good to agree on regular "touchpoints" with key stakeholders in the process, start
of the day and end of the day are good ones, with sufficient time in between to do your
research and generate findings.
Not only do you communicate back to the senior management of the acquiring company, you also
need to keep your contacts at the target company updated on whether you are getting the help
you need, getting the documents you need, and whether you have access to the persons
you need to speak to.
How do make sure we get a full picture?
What if the target company fails to disclose relevant information?
It's important to ask a significant number of open-ended questions, things like "what
else should we be aware of regarding your service delivery process?", or "are there
any other concerns or open cases regarding the environment, health and safety?"
Questions like this help emphasize the seller's obligation to disclose.
It's advisable to withhold part of the total acquisition sum on the deal signing.
That way, if any material items come up later that should have been disclosed during the
due diligence process, you can withhold payment until the issue is resolved, rather than having
to look for compensation in court for information that was misleadingly withheld.
There is a difference between a substantial risk in a due diligence and an improvement
opportunity.
The target company might be running some aspects of their business in a way that you disagree
with, but that does not necessarily mean it is a business risk.
While working on the due diligence, visualize the post-closing situation.
What does the combined company look like, once the pieces of the puzzle are put together?
You can also add value by helping to prioritize the integration priorities and risks.
The final step of your due diligence project could be to provide a briefing and do a handover
to the integration team.
There you have it!
10 valuable due diligence tips!
Take it seriously!
"Rightsize" the team Put together a diverse team
Confidentiality at all times Good checklist and a good brainstorm
Solid documentation and report out Clear communication structure
Mitigate incomplete information Distinguish risk and opportunity
Visualize and prepare for the "post-close"
I hope this was helpful.
Thank you for watching!
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More videos coming soon!