Tuesday, October 31, 2006

Mergers & Acquisitions Due Diligence, Part 1
In advising companies that are acquisition candidates, two of the questions that I most frequently receive are:

1. What should I expect from the due diligence process?
and
2. How can I best protect my confidential information while still moving the process forward?

Of course, the due diligence process varies widely based on a number of characteristics of both the acquiring company and the target company, including size, maturity, process-orientation, public vs. private, and competition for the deal. However, it is possible to provide a general answer to the two questions above. I’ll cover #1 in this post, and #2 in the near future.

1. What should I expect from the due diligence process?

Generally, the information that an acquirer expects is broken down into the following categories:

• General Corporate Matters
• Financial, Accounting, and Taxes
• Technology and Intellectual Property
• Product / Service Offerings
• Operations
• Sales and Marketing
• Human Resources and Personnel
• Legal and Regulatory

Within each category, there tends to be two distinct types of requests: document requests, and questions to be answered over the phone and in meetings. Often, it possible that there will be a “priority” due diligence checklist early in the process and a more detailed one later.

Also, a savvy acquirer will want to see projections, reports, and other documents actually used by the company, as opposed to specially-created projections and reports just for the M&A process.

Ultimately, anything that could be material enough to affect the valuation of the business is fair game. Since the potential acquirer doesn’t know what is material until it asks, the initial due diligence list can be overly long, with a number of requests that are irrelevant. So, don’t panic when you see the list for the first time – a number of the requests may be able to be disposed of quickly.

Usually, the potential acquirer will want to visit your offices and speak with most of the top management team. Balancing these demands with the need for secrecy, while being reasonable and maintaining a good relationship with the potential acquirer, is certainly one of the challenges of the due diligence process.

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