In 2020, the arrival of the coronavirus pandemic forced many companies to operate remotely. Despite this shift, the Wall Street Journal reported that deal-making is “soaring” in the wake of the pandemic: global companies signed more than $1 trillion worth of deals in Q3 2020, compared with $762.67 billion in the third quarter of 2019.
How are companies pushing M&A due diligence forward during this time? Technology is unquestionably the biggest factor expediting due diligence in a remote environment, but there are additional steps that can help streamline the process. This article covers six best practices for conducting remote due diligence.
1. Ensure You Have the Right Technology
For years, virtual data rooms (VDRs) have made it possible to conduct legal and financial due diligence remotely, allowing users to securely share confidential documents with other companies. According to the Wall Street Journal article, “data rooms, used to verify and assess financial records and documents, have become an even more essential part of deal making.”
But now that in-person meetings and site visits aren’t always possible, more technology is needed so operational and environmental due diligence can also be carried out remotely. Companies are using video conferencing solutions like Zoom, Webex, and Microsoft Teams to conduct virtual site inspections.
Video also helps replace the face-to-face interaction that has always been a pivotal piece of the due diligence process. Building trust with any potential business partner is imperative, especially when millions or billions of dollars are at stake. By planning frequent video meetings throughout the process, all parties should feel more confident about the prospect of working together.
2. Prepare for Longer Due Diligence Periods
Due diligence is already a lengthy process when conducted in-person, and for a good reason. Both parties want to be sure that the proposed deal makes sense, and that the other side is providing an honest representation of their business.
You should adjust your expectations and allocate enough time in the M&A process for remote due diligence. With technology challenges like user error, connectivity issues, and video fatigue, it's rare for remote due diligence to progress as smoothly as in-person interactions, especially for businesses that are still getting used to new technology.
According to this American Bar Association article, it’s becoming more common for buyers to require additional time for due diligence, and exclusivity periods are now often 90 or 120 days instead of 60 days. Sellers should also expect greater scrutiny from buyers who want to see how their business model has changed due to the pandemic, which extends the process as more information must be exchanged and reviewed.
3. Remember Confidentiality Issues
Data privacy and security issues are elevated when due diligence is carried out remotely. Everyone on your due diligence team must be familiar with and follow your confidentiality policies, and only share sensitive data when necessary. And while you should only invest in technology solutions that prioritize security, there are more opportunities to unintentionally share information when multiple solutions are in use. Develop procedures for sharing confidential information to reduce the chances of your private company data inadvertently ending up in the wrong hands.
Virtual data rooms come equipped with security features to make this process easier, including two-factor authentication, document watermarks, audit logs, and permission-based user roles. All of these features help you remain in control of the file sharing process, and limit the fallout if any documents are accidentally shared with unauthorized users.
4. Engage With the Right People
Connecting with your would-be business partners is essential during remote due diligence, especially if you’ve never met in person. While some businesses are already familiar with each other, with relationships that predate the pandemic, many others are only “meeting” for the first time. Remote M&A transactions make it “more difficult to peel back the layers of the onion,” according to Brad Haller in the Wall Street Journal article.
Reaching out to your existing network - such as entrepreneurs, venture capital firms and co-investors - can help do much of the legwork for you. These connections can provide references and verify a company’s reputation, making it less likely that the deal will fall through. In the absence of such a network, you can also call on M&A advisors and lawyers to handle specific parts of the due diligence process.
5. Have Organized Meeting Agendas
The key players in a deal should communicate early and often, including video meetings whenever possible. These meetings should discuss topics such as progress updates and risks that have surfaced during the process.
Having an organized meeting agenda, and adhering to it, ensures that all participants will efficiently share their information and concerns. Since holding virtual meetings lowers the barriers to attendance and enables more people to participate, ensuring every meeting has a detailed agenda will help keep things on track and on time.
Expect that you’ll spend more time in meetings during remote due diligence (as discussed above), especially if you’re not already familiar with the other business. This may include repeated conversations with key players, product and tech demos, and informal discussions to get to know others involved.
6. Communicate Often With Key Stakeholders
Clear, frequent, and honest communication among stakeholders is especially important during remote due diligence. Because doing business remotely is less personal than face-to-face connections, questions and concerns must be addressed promptly to avoid the risk of cold feet.
In particular, frequently touching base with key parties will prevent your organization from going down the wrong path in an M&A transaction. Be especially careful when building models and running analyses during times of economic turbulence, separating temporary stumbles from deeper structural problems - and be sure to communicate your conclusions to key stakeholders. For example, can a would-be M&A partner’s recent downturn in performance truly be ascribed to the pandemic, or are there larger concerns at stake?
Although some aspects of remote due diligence are more challenging than performing it in person, deal-makers are becoming more confident and proficient in the remote due diligence process - thanks in part to key technology like virtual data rooms.
SecureDocs Virtual Data Rooms make it easy to conduct remote due diligence, and can be set up in just 10 minutes. All plans include unlimited users and documents, 24/7 support, and flat-fee pricing starting at $250/month. Start your free trial to start setting up your data room now.