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The Due Diligence Process for M&A: A Complete Guide

    

So, a prospective buyer has shown interest in your business, and you've decided to entertain the idea of a acquisition. First of all, congratulations; this is an exciting prospect for both companies involved! At the same time, with any business acquisition, it's important to realize just how long and involved of a process this can be.

Even though you may have received interest around the purchase of your company, it's important to realize that this is only the beginning. From here, the company looking to purchase your business will need to go through the complex due diligence process, wherein a team of accountants, lawyers, and other business acquisition professionals carefully examine every facet of your business to ensure that they're making a sound investment. 

All told, the entire process can easily take anywhere from three to six months. As such, it's a good idea for you to prepare yourself for what's to come. By gaining a thorough understanding of what to expect from the due diligence process, you'll have a better understanding of what to expect and how to handle the entire situation properly so that, in the end, everybody can come out ahead.

Aspects of M&A Due Diligence

Of course, no two acquisitions are the same, so the due diligence process will vary from one situation to the next. In general, however, there are up to five types of due diligence that will need to be completed as part of the process. 

Business Due Diligence

This will apply to every potential merger and acquisition out there. Essentially, this aspect of due diligence seeks to determine whether the company's revenue and cash flow is sustainable as a long-term investment and whether the business has potential to grow. This will involve careful analysis not only of your current finances, but perhaps a market study of your target customers/consumers as well. 

Accounting Due Diligence

In this aspect of due diligence, the team will be focusing on making sure that the financial information you have provided to them is accurate and honest. Often times, this includes preparing a "quality of earnings" report, which is often done by an accountant. This is the part of the due diligence process where you will likely play the largest role and be asked to provide the most documentation/information.

Legal Due Diligence

This part of the process will involve looking into the legal aspects of your business. Lawyers will take a look at the current contracts you hold with providers and assess them for any potential liability issues. If you have any leases that are ongoing, the legal team will also want to review these to make sure you will have continued access to the property, facilities, or equipment needed to keep the business running after the acquisition.

IT Due Diligence

During the IT due diligence phase, a team of IT professionals will likely be brought in to assess your company's current IT resources. Specifically, they'll be looking for security risks, down time issues, and other IT problems that may need to be resolved before the deal can be finalized. This part of the process may vary in significance depending on the industry in which your business operates.

Environmental Due Diligence

Depending on your industry, the due diligence team may also want to spend some time focusing on uncovering any environmental risks that may be associated with acquiring your company now or in the future.

Approached for an Acquisition: Now What?

No matter how big or small your company may be, there are some important steps that will need to be taken by the acquiring company before they're ready to finalize an offer. During the due diligence process, you will be asked to provide a great deal of detailed information to the acquiring company's due diligence team.

Meet the Due Diligence Team

Let's begin with an understanding of who will be involved in the due diligence process. From the side of the proposed acquiring company, you can expect to be working with:

  • the investors themselves
  • the investors' lawyers
  • the investors' accountants
  • professional consultants
  • other service providers (varies based on industry) 

More than likely, each professional or group of professionals involved in the due diligence team will have their own unique tasks to complete throughout the process. It's likely that they may each even have their own due diligence checklists to follow in terms of what information they need to obtain from you and what to do with that information specifically. The professionals you will be working with most will likely include the accountants, consultants, and lawyers.

Prepare for Data Requests

You may feel overwhelmed by the amount of data requested during this time, but it's important to understand why this is being done. The company looking to acquire your business needs to make sure that they're making a sound investment and keeping their best interests in mind every step of the way. As such, some of the kinds of data you may be expected to furnish include:

  • corporate records
  • stockholder information
  • IP contracts
  • history of litigation
  • insurance information
  • regulation information
  • financials and leases 

If you put yourself in the investor's shoes, the reasons for needing this kind of information make more sense. For example, would you want to know if a company you were considering buying had five current lawsuits on its hands?

Understand What They're Looking For

There are countless factors that will be taken into consideration while the due diligence team reviews and scrutinizes your data. There are also some potential "red flags" they'll be looking for that could cause them to change their offer or perhaps even back out of the deal altogether.

For example, one of the main things that the due diligence team will be looking for is an indication based on your records of whether or not the company is financially strong and credit-worthy. They'll also be looking at your company to determine whether or not you may be exposed to any potentially dangerous regulatory or liability risks that could affect the deal. Many due diligence teams will also be looking at your company's current management and employees to determine which members are the most valuable for the company and what steps may need to be taken to keep them on-board following the acquisition.

Essentially, what the due diligence team is looking for all boils down to three questions:

  1. Are there any problems or issues that have been discovered that may lead the acquiring company to abandon the deal, no matter how good the price?
  2. Are there any problems or issues that have been discovered that would warrant a change in the pricing, structure, or timeline of the deal?
  3. Is the due diligence team meeting regularly to discuss and address any information relevant to questions 1 and 2? 

Waiting for the Final Report

Once the entire due diligence process has been concluded (remember that this can easily take several months or more), the team will meet to compile a report, which will then be sent to the acquiring company's management team.

This standard report will basically include a summary of all potential issues/problems discovered, along with a summary of areas where the business was found to have a clean bill of health. Ultimately, the report will conclude with a section that will generally include one of the three possible recommendations:

  1. the acquisition is seen to be a sound investment and the deal will continue as planned
  2. the deal needs to be adjusted based on the findings of the due diligence team
  3. the deal should be abandoned altogether due to the report's findings

Consider Using a Data Room

With so many different documents and records to furnish to your potential buyers, you may be wondering what the best way to go about sharing this information will be. This is where having a dedicated data room can make all the difference. A secure data room allows you and your potential buyer to share documents and other information in a high-security setting so that your IP and proprietary information is guarded. In other words, a data room essentially provides a "one-stop-shop" for both parties to access the documentation they need while expediting the entire process of reaching a deal.

It is important to know that sometimes during the acquisition or due diligence process; the deal either doesn't pan out or the offer changes after certain findings are uncovered; this simply means that the fact-finding mission completed by the due diligence team didn't align with the original deal or goals of the investors.

Why Use a Data Room?

Going back to the idea of utilizing a data room to share documentation between your company and the proposed acquiring company and their due diligence team, there are some important factors worth taking into consideration. 

A data room hosted by SecureDocs can truly help to protect your company's intellectual property, stay on-track of what's going on throughout the due diligence process, and speed up the entire process. Not to mention, there are a number of features that will be useful to you along the way. For example, the included audit log allows you to see who has been looking at the files you've shared and for how long.

Let's say you recently uploaded a certain legal document requested by the due diligence team, and you checked the log to find that their team just spent four hours looking at that one document. This might serve as a sign to you that you should speak to your lawyer about the document and make sure there weren't any glaring errors or other issues that may have led the team to scrutinize the document for so long

Protect Your Data and Property

With virtual deal rooms provided by SecureDocs, you're always in control of your data. Specifically, you have the power to control who accesses the data you upload through the use of permission-based user roles. You can also easily watermark all documents with a time stamp, name, and e-mail for your added peace of mind.

And of course, a non-disclosure agreement is required to be signed by all users before entering the deal room, so you can rest assured that your intellectual property is protected.

Maximize Your Deal Potential

The SecureDocs deal room also makes it easy to create an auction-like environment that drives deals, giving you insight into data room activity through audit trail reporting, and allowing you to achieve a more accurate understanding of who is truly interested in your deal based on the actions they're taking on the platform itself. As a seller, this works greatly to your advantage. 

Expedite the Entire Process

The due diligence and deal-making process can be long and drawn-out, but features by SecureDocs can help speed things up. For starters, the virtual data room is user-friendly, and even those who are completely new to using the virtual data room typically need no training or explanation on how to use it; this saves both sides time.

Not to mention, it takes less than 15 minutes to set up your virtual deal room from start to finish. From there, you'll be ready to get started.

Always Know What to Expect

Unlike other data room options that may come with a high price tag and hidden fees, you'll also know what you're getting into with SecureDocs. You pay just one flat fee that includes unlimited storage and unlimited users at your authorization. No surprises here.

As you can see, the entire M&A due diligence process can be complex and drawn-out. You will be working with a number of professionals throughout the process and will need to provide a great deal of data and information along the way. Ultimately, however, all of your patience and hard work will be more than worth the hassle when you're able to reach a deal to sell your company. And of course, with tools from SecureDocs assisting you through each step of the process, you can make things much easier on yourself.

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