Frank Aquila and Melissa Sawyer Speed Reading Series: Top 10 Considerations for Organizing M&A Due Diligence

Frank Aquila and Melissa Sawyer Speed Reading Series: Top 10 Considerations for Organizing M&A Due Diligence


Planning a significant due diligence process can be daunting, even for experienced deal makers. Some foresight and a little preparation can make the process go smoothly. Spending a few hours at the outset thinking through the process carefully can also save a client a tremendous amount of time and money as the deal progresses. By anticipating and preventing roadblocks, focusing in on key issues, determining what deliverables will be most useful and avoiding duplication of efforts, an advisor can develop an effective approach to any M&A due diligence process. Ensuring that diligence findings are communicated efficiently and properly assimilated into the deal negotiations makes all the effort worthwhile. This article outlines ten practical tips for organizing a due diligence exercise to maximize the benefits of the process, while staying on schedule and reducing costs.

This article is part of the "Speed Reading" series in which the authors highlight practical tips and recurring issues in M&A transactions. Other "Speed Reading" articles are: Aquila and Sawyer on Rights Plans, and Aquila and Sawyer on Issues in a Public Company Merger Agreement.

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1. Scoping Out the Assignment

Before starting due diligence, advisors and their clients should pause to discuss the scope of the project. The discussion should cover the following topics, among others:

  • Scope. What is the scope of due diligence? Is the purpose of the diligence exercise merely to identify issues that could impact the transaction valuation, structure and/or deal timing, or are the diligence findings also expected to form a basis for future integration work?
  • Work Product. What kind of work product does the client want to receive? Detailed document-by-document summaries or an executive summary that only highlights material issues? The answer will be closely related to the scope of the project and the expected audience for the report. Delivering a two-hundred page report to a board of directors usually is not appropriate, but the head of an integration team may be thrilled to receive that level of detail.
  • Materiality. Is there a materiality threshold below which the findings are unlikely to justify the expense of performing diligence? This question is becoming increasingly important because virtual data rooms have made it possible for a seller to give a buyer access to its entire electronic contract database without making any effort to distinguish between a multi-year, multi-million dollar key supplier agreement, on the one hand, and a landscaping contract for the corporate headquarters, on the other hand.
  • Transaction Structure. How will the transaction be structured? If the target is a public company that files periodic reports and audited financial statements with the SEC, a buyer might elect to (or, in a hostile deal, might have to) rely on a more cursory due diligence review (understanding, of course, that relying primarily on the seller's public disclosures will leave the buyer exposed to undisclosed risks). In contrast, if the transaction is a small asset sale with detailed disclosure schedules, the due diligence may need to be much more granular.
  • Risk Allocation. What liabilities is the buyer expected to assume? If the business deal is that the buyer will be fully indemnified against all environmental liabilities, for example, it may be more important for the buyer's diligence team to spend its time and money analyzing the credit risk associated with accepting an indemnity from the seller rather than performing a detailed review of the underlying environmental risks.
  • Known Risks. Should the team focus on any particular types of risks given the identity of the seller or the nature of the industry?

2. Pulling Together the Team and Coordinating Results

When it comes to performing due diligence, advisors are not "one size fits all". Depending on the type of transaction and the industry, a buyer may need to hire multiple specialized diligence providers, such as a tax and financial accounting firm, an actuarial firm (more common in certain insurance deals), a loan portfolio consultant (more common in loan portfolio or banking deals), outside counsel including, in some cases, local counsel, an employee benefits/human resources consultant, an environmental consultant and/or a real property title search firm.

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