Merger & Acquisition Insights

4 Keys to Expediting Due Diligence

Posted on April 23, 2020 by Stephen Joest

Once a Letter of Intent (LOI) is executed between buyer and seller, the parties advance to the due diligence phase with a basic deal structure outlined and the protection of confidentiality and exclusivity provisions. The due diligence phase allows the buyer to take a detailed look into the operational, financial, legal, tax, human resources, and various other attributes of the seller’s business in order to confirm their understanding before drafting the final purchase agreement. After months of time and energy invested in a deal process to make it to due diligence, it is tempting for sellers to take their foot off the gas as the end is in sight and “deal fatigue” is starting to set in. However, it is critical for all parties to lean in at this critical juncture in the deal process in order to reach the closing table. Due diligence has the potential to be overwhelming for sellers and threaten the path to close when it is not handled in an efficient and effective manner. Particularly in the current environment when buyers and lenders are proceeding with caution and deal volume is likely to decline, it is critical that sellers avoid any unforced errors in the due diligence phase. Below are four strategies for mitigating challenges posed during the due diligence phase in order to facilitate a successful transaction outcome.

1. Communication

Communication internally (i.e. seller & advisors) and externally (i.e. buyer & seller team) is critical to a successful due diligence process. Within a few days of executing the LOI, the seller team should schedule an internal call with all relevant advisors and members of the management team at the beginning of the due diligence process to clearly define expectations for response time, ownership of various requests, periodic status updates, etc. The seller team should then coordinate a similar external call with relevant members of the buyer team to discuss communication protocols and the flow of information. Over-communicate to ensure both sides are clear on the nature of each request, status updates as requests are fulfilled, prioritization, and issues management so that any roadblocks are navigated quickly. Throughout the due diligence phase, schedule status calls weekly (at a minimum) to ensure that due diligence can be completed in a timely manner that keeps the closing process on track with the exclusivity period dictated in the Letter of Intent (typically 90-120 days) and leaves sufficient time for negotiating the Purchase Agreement.

2. Prioritization

All requests are not created equally. It is important to communicate with the buyer to understand their preferences in terms of priority across diligence workstreams (i.e. financial, legal, etc.) and within each workstream (i.e. high, medium, and low priority Financial requests). This allows the seller team to break down a due diligence process that seems overwhelming in totality into bite-sized sprints that can be accomplished in days rather than weeks. This also allows the buyer and seller team to work through any issues related to critical items first, rather than spending weeks on ancillary requests before uncovering an issue that has the potential to bring the deal to a halt.

3. Organization

When dealing with hundreds of requests across multiple workstreams, it is critical to invest time up front to create an organized data room and detailed status tracker that will be shared with the buyer and seller teams to serve as 1) an overview of status and due dates by request and 2) a roadmap to the data room. Although it is more efficient in the moment to dump dozens of files in a single location, it saves significant time and frustration in the long run when files are clearly labeled and placed in an appropriate folder so that relevant parties can quickly access and review.

4. Balance between confidentiality and resource allocation

There is no “I” in “team” when it comes to due diligence. Business owners must have a strategy for who else to involve in facilitating due diligence requests. Confidentiality is certainly paramount in any transaction; however, it is often far too much for one or two individuals to handle hundreds of diligence requests across multiple workstreams on top of their existing operational responsibilities, personal & family commitments, etc. Each transaction is different, however it is important that business owners intentionally navigate this trade-off at the outset and determine the appropriate Management team members and external advisors to assist in the due diligence process to avoid slowing down the process and jeopardizing the path to close.

Tags: Selling a Business

Category: Articles