One of the most important parts of making a deal successful is carrying out a successful due diligence. What is exactly due diligence and why it is so important?
Due diligence is an investigation or an audit into a target firm to confirm all facts, such as reviewing all financial records, checking legal issues and anything else deemed material for the intended acquisition. It refers to the care a reasonable person should take before entering into a purchase agreement with a seller.
The main goal of a thorough due diligence process, that includes both traditional and non-traditional assessment of a target firm, is to prevent surprises after the deal is done. Unfortunately, due diligence checks very often are inadequate in many deals because acquirers underestimate the procedure. This is a big mistake.
Here are some tips for carrying out a successful due diligence.
- Get yourself an experienced M&A lawyer
Firstly, do not try to do it with amateurs or people who do not have experience. Get yourself experienced M&A lawyers to plan and carry out the due diligence process. Here at Woźniak Legal
, we pride ourselves on our skills in comprehensive legal advice and coordination of the entire M&A process, including due diligence. The first step typically is determining how big the target firm is and what needs to be checked. Usually, it is necessary to carry out both legal due diligence which is vital for checking the legal issues as well as financial due diligence which is vital for establishing the value of the business.
- Be prepared to ask difficult questions
The main goal of a thorough due diligence process is to prevent surprises after the deal is done. There is a tendency for a careless due diligence among executives who know each other well. Executives who know each other well are more likely to rely on the representations and warranties given by the seller. The lawyers must be tough on this point because nothing can be assumed. You must be ready to ask difficult questions to the seller and get all the answers.
- Get extensive documentation from the seller
Typically, the first problem lawyers face when they start the due diligence examination is the lack of comprehensive data from the seller. The sellers often do not want to disclose too much information in order to avoid additional questions from buyers. Sometimes it is a part of the sellers’ tactics, and at other times it may be an attempt to hide problems. Lawyers must be tough on this point because collecting all documents is of paramount importance. Lawyers must be sure that they have comprehensive information about the target company and so they can fully analyse the situation from a legal and tax point of view. There is no "one size fits all" solution and lawyers must adopt a very flexible approach.
- Be prepared to carry out an extra investigation if required
Lawyers should be responsible for collecting all relevant information from various fields and comparing the results. Sometimes, only the comparison of the financial data against the legal issues can give a signal that there is a problem. If the need arises to continue investigation in order to establish the material facts, you should be prepared go an extra mile and do the additional research.
- Keep it confidential
Keep the information about the project confidential. Get yourself a new email address for communicating with your advisors if necessary. Think of using code names because the risk of disclosing sensitive information such as the name of the target firm and your plans is really high and it can ruin the whole process. Here at Woźniak Legal
, we understand that the process of acquisition must be meticulously planned and executed. Remember – the devil is in the details.