Thoughts on Mergers & Acquisitions Due Diligence

By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

In a merger & acquisition transaction due diligence is a critical process with a purpose. The extent of the process varies depending on the type of company being acquired and the entity that is doing the due diligence. The purposes of M&A due diligence are always to prove assumptions, confirm information received or perceived, and gather more information, all to determine if you’re getting what you think you’re getting. In order to prove assumptions, the M&A buyer often does exhaustive research on the company it is buying. Sometimes an M&A buyer will vary what it needs for due diligence based on the amount of money it has at risk. If the merger & acquisition transaction is a fire-sale situation, the M&A buyer may do a minimum of due diligence. In most cases, however, mergers & acquisitions due diligence will be stringent.

The company being acquired, whether by purchase of assets or stock or by statutory merger, will be analyzed so that the M&A buyer thoroughly understands the company. Why? Because the M&A buyer wants to limit its risk and determine what it needs to fix in the company following the acquisition.

What do M&A buyers investigate? Quite simply, a buyer will conduct mergers & acquisitions due diligence on every aspect of a company that it needs to know about to feel comfortable with the purchase. You as a seller have little say in terms of the scope of investigation but have a lot to say about when certain aspects of mergers & acquisitions due diligence can happen. For instance, a seller could give the M&A buyer all financial due diligence information requested and hold off other due diligence information (e.g., speaking with customers and employees) until the financial due diligence has proven to be acceptable. Sometimes a seller, especially a first-time seller acting on its own without having adequate representation, will allow significant merger & acquisition due diligence to take place prior to having reached an agreement on the purchase price and the terms of the purchase. This can be risky. Almost everyone has heard of an M&A buyer seeking information though he or she was not genuinely vested in acquiring a company. The seller’s business could be hurt either by the distraction or by the information provided.

You as a seller can help make the mergers and acquisitions due diligence process run more quickly and smoothly if you’re prepared in advance. The best way is to go through a mock merger & acquisition due diligence process, also known as a due diligence audit, prior to attempting to sell your company. A due diligence audit begins by engaging a CPA firm and a law firm to perform merger and acquisition due diligence on the company in order to determine what the M&A buyer will find. When the audit is completed in advance of a M&A buyer’s due diligence, the company owner is able to see what Mergers & Acquisitions due diligence entails, without the pressure of needing it to be done on a tight schedule. He or she can then correct any issues that arise and thus be better prepared for the M&A buyer’s due diligence process. Nothing done as part of a M&A due diligence audit is wasted. All the materials gathered will be useful at a later date, and the findings will be invaluable. For example, prior to attempting to sell your company, wouldn’t you want to know that it is totally clean, from legal, tax and accounting viewpoints? Wouldn’t you want to know what risks you’re taking but are not aware of? Wouldn’t you like to know what you can fix to make your company more attractive to an M&A buyer? Wouldn’t you like to have as smooth an M&A buyer’s due diligence process as possible?

The next-best way, although it is not nearly as effective as having a mergers & acquisitions due diligence audit, is to have most of the due diligence materials ready prior to the M&A buyer’s request for them. This helps to keep the deal moving forward, makes the mergers & acquisitions due diligence process go more smoothly and shows the M&A buyer that the seller is serious and organized. Striking while the iron is hot is a rule best observed if a seller really wants to move on.

A seller who is unprepared, disorganized and unable to gather information in a timely manner makes a bad impression on an M&A buyer. When mergers & acquisitions due diligence is being performed, it is crucial for a seller to be highly responsive to the buyer’s requests. Otherwise, the M&A buyer may think that the seller is not making a serious effort to get the deal closed. If this happens, the merger and acquisition transaction may not happen, simply because the seller was slow gathering materials and the buyer got discouraged and moved on to pursue another merger & acquisition opportunity.

M&A Due DiligenceGathering merger & acquisition due diligence materials is a time-consuming and tedious process. It can oftentimes distract, and may prevent, the seller from paying attention to business. A good piece of advice is to get others involved to help speed up the task. These others could be people within the organization or could be people from outside the organization, such as a corporate CPA firm or attorney.

Following or as part of mergers & acquisitions due diligence, depending on how the process is viewed, the purchase agreement will have a number of supporting schedules that will need to be completed as part of the representations and warranties of the seller. Putting these schedules together is critical to completing the merger & acquisition transaction. Many times a seller will underestimate the amount of work involved to gather information for these schedules, and the M&A transaction will be delayed until the schedules are completed. Here, too, it’s a smart move to get others involved to speed up this task, but in this case, the mergers and acquisitions attorney negotiating the transaction must be involved with the finalization of the various schedules, which become part of the purchase agreement.

 Although gathering and presenting mergers & acquisitions due diligence materials can be difficult and serve as a distraction from managing the everyday business of the company, M&A due diligence is critical to the closing of a merger & acquisition transaction. M&A buyers take due diligence very seriously and form opinions regarding the selling company, not only from the materials presented but from when and how the information becomes available. As a seller you can put your best foot forward by being organized and responsive to the M&A buyer’s requests, or you can chance making a negative impression. The choice is up to you. We’ve all heard about the big fish that got away. Our best advice is to choose wisely how you go about mergers & acquisitions due diligence, because sometimes there are no second chances with M&A buyers.

Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at jlyons@lyonssolutions.com.

Copyright 2010 Jack Lyons. All Rights Reserved.