CHAPMAN ASSOCIATES
MERGERS & ACQUISITIONS
For many sellers, withstanding the challenges of the due diligence phase depends on keeping their emotions in check and anticipating the buyer's requests for information.
If you have been through a business purchase or sale, you have likely experienced the unique tension and strife common to that phase of the deal known as due diligence.
For first-time sellers who have just received a signed letter of intent, due diligence may seem like an interminable period during which the buyer mutates from a celebrated connoisseur nonpareil of business desirability and value to a greedy hoarder of data and documents whose capacity for annoying demands for minutiae and innuendos about the status of non-existent records is, in the mind of the seller, equivalent to calling his company an ugly child.
In reality, though, due diligence is simply a normal part of the business ownership transition, and most apprehensions leading into it stem from fear of the unknown.
The Value of an Intermediary
While due diligence may feel bewildering at first, part of what a top M&A advisor does is help their client prepare for, understand, and navigate the process – successfully and with the least possible disruption.
First-time sellers often assume that the primary value of their M&A professional is in attracting potential buyers. After successfully navigating the due diligence phase, they tend to have a broader appreciation for what their intermediary helped them achieve – especially in leveling the playing field with the buyer.
In due diligence, the buyer and seller usually are not on equal footing. A professional buyer has often been through the process and has a checklist of due diligence items. The experienced buyer is also better equipped to make the deal 'just business,' which is an advantage over a first-time seller who built the company from nothing into something extraordinary and feels like they are giving up their firstborn. A successful closing often hinges on whether the seller can adjust, sometimes in significant ways, to the atmosphere of the deal.
Many business owners are self-sufficient and unaccustomed to relying too much on others. For some, the biggest adjustment they make during due diligence is to surrender control of the deal and start trusting their M&A professional to anticipate and respond to buyer requests and serve as a communication filter and emotional buffer between the parties.
Due Diligence Defined
In its simplest terms, due diligence ensures that things are as they appear before a deal is finalized. While it takes work, due diligence helps squeeze risk out of a sale, protecting the buyer and the seller. It protects the buyer from buying something different than what has been represented. It helps the seller be thorough in material disclosures and avoid having a buyer assert that things were undisclosed as a claim for damages.
For someone considering a merger or the purchase of a business, document review and the answers to due diligence questions are critical. It is a complex, time-consuming process, but with so much on the line with any merger or acquisition, neither buyer nor seller wants to make a significant decision without a solid foundation of accurate information.
A vital goal of the due diligence process is to find potential problems, such as liabilities and contractual issues. The result should be that the business's selling price is justified and both parties are satisfied. It is very common for problems and issues to pop up during due diligence, so it's important to stay proactive and be open to negotiation until the deal is finalized.
While the types of information that a buyer (or seller) may request varies with the nature and size of the business and the specifics of the transaction, here is a general and summarized list of information requests that are likely to arise during due diligence. In practice, the list is longer and more detailed.
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