Due diligence is an inevitable part of the process when two or more companies are merging or one company intends to acquire another one. The investigation essentially involves a ton of information gathering and analysis, as those involved in the deal want to ensure that they completely understand where the other party stands with respect to a number of important matters. Even though there is a basic structure and purpose, not all due diligence investigations will proceed in the same manner or address the same issues. In fact, there has been a growing trend toward the inclusion of both hard due diligence and soft due diligence. For those not as familiar with this newer focus, here is a rundown on the two types:
Hard due diligence really comes down to the collection and evaluation of concrete data. This is the type of due diligence investigation that most business professionals are no doubt aware of and perhaps even participated in at some point. Of course, this is also the area in which the legal team, accountants, and deal facilitators will be actively engaged. The professionals involved will want to see some of the following items.
When it comes to understanding another company, especially the target of an M&A deal, it is key to look at all available facts to ascertain the company’s status. The team of consultants tasked with overseeing this sort of investigation will want to examine company records, existing contracts, employment agreements, the business model and strategy, marketing plans, the client base, and so on. Basically, this aspect of the investigation is focused on identifying potential weaknesses and liabilities.
The financial piece of the due diligence process is really the bread and butter of the entire deal. Engaging in M&A activity is all about maximizing profitable opportunities, so understanding the other company’s financial status is of paramount importance. For this part, there will be requests for virtually any and all financial documentation, such as the balance sheet, financial statements, securities instruments, operational expenditures, projections, among many other potential items. The whole point of merging or acquiring another company is to generate profit not problems, so taking a look at the company’s money matters is critical to getting the deal closed.
The Legal Side
The very concept of due diligence rests on the idea that those hoping to gain from a transaction must diligently research the intended target. And, in today’s rather litigious society, it is imperative for every detail to be scrupulously reviewed beforehand so that any possible issues are identified and rectified or there is time to pull the plug on the whole thing.
Although hard due diligence concentrates on verifiable data, soft due diligence is a bit harder to conduct. In addition to ensuring that a company has its records and finances in order, it is also important to understand the people behind the enterprise. Thus, this type of due diligence is not about the actual capital but the human capital, which in some ways, can actually be as important if not more so.
In the case of an acquisition, there may be leaders and employees who will remain within the newer, larger organization. As a result, the acquiring company will want to ensure that those individuals will be able to acclimate to what will no doubt be a new way of doing things. In addition, the existing leadership is in the best position to facilitate a smooth transition, as they should be able to provide support and information to the acquiring team and their own employees.
Corporate culture is an increasingly important topic in the business world. Of course, a potential clash of cultures or ideas is always a possibility when different companies seek to become one, much like the marriage of two people. For this reason, soft due diligence is growing in popularity and entails a kind of getting to know you phase amongst the key leaders. Although it is less likely that misaligned cultural viewpoints will result in a complete disruption of the deal, it can certainly impact how the transaction unfolds.
The Human Side
It is pretty clear that soft due diligence is conducted in recognition of the fact that the people behind a business are ultimately the backbone of the company and often the very drivers of a company’s success. Failing to learn about the people in the same way that hard due diligence helps with understanding the company at a document level could prove problematic down the line. For this reason, it is not surprising that soft due diligence is becoming rather commonplace.