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8 Steps to a More Successful M&A Due Diligence Process

Kison Patel
CEO and Founder of DealRoom
Kison Patel
CEO and Founder of DealRoom

The important role that due diligence plays in successful M&A transactions is by now well established.

Everybody is aware of the various components of due diligence and how they relate to a target company’s functions. Articles on financial due diligence, operational due diligence all contribute to a better knowledge of the process.

This article does not seek to add to this literature. Rather, it seeks to provide practitioners with a set of steps - a framework for successful due diligence that DealRoom has seen the best practitioners use.

These companies essentially know where their due diligence process is headed before it even starts. They begin with technology. 

1. Employ Superior Technology 

There is no excuse to not use technology in the due diligence process. This begins with hiring a specialised due diligence tool.

DealRoom provides services in this area together with pre-built diligence templates that help start the process easier, but its solution is just one of several on the market that offer a flexible, quality service.

It would be wise to shop around and see what specifically fits your due diligence requirements. Depending on the target company profile, you may also invest in technology such as auditing or document scanning software.

These tools aren’t always cheap, but more often than not, they represent a good investment in the due diligence process. 

master due diligence playbook

2. Develop Hypotheses

Developing some hypotheses about the target company is a good short-cut to getting to the issues quickly. Each part of due diligence (financial, operational, compliance, etc.) will have its own hypotheses.

These do not have to be rigidly adhered to, but rather seen as a roadmap of where your team would like to take the process. So, for example, if a company’s revenues are mostly earned abroad, your hypothesis might focus on some issues in countries that have a poor track record on contract enforcement or perhaps even some geopolitical issues.

Again, at this stage, it’s still just broad brushstrokes. 

3. Make an Overview of the Process

Development of the hypotheses will ultimately feed into a broader overview of the process. This is where technology comes into its own. As you divide your working environment into separate categories of due diligence, DealRoom enables users to create requests along the way.

For example, every due diligence process will require audited financial statements, so obtaining these documents would be one of the requests in the financial due diligence section.

due diligence financial

Each company will have a different process, depending on its industry and its specifics, meaning that the overview is important.

Technology firms will obviously focus more on technology due diligence, and this in turn would then break into further components (software stack, processes, IP, etc.). 

4. Assign Responsibilities

Knowing who will be responsible for what before the due diligence process begins is a crucial component in getting the job done right.

If your legal team doesn’t have sufficient expertise in an area, say, foreign law or IP regulation, ensure that you hire third parties that can do the job properly.

Depending on the scale of the target company, you may also need to draft in forensic accountants, for example. Having the right people in place for each task may be the most important part of all for the due diligence process, because the right people will identify issues even when the process you have designed could have overlooked them. 

5. Create a Timeline / Track Progress

This seems like an obvious one, but with so many overlapping components in the due diligence process, it’s easy for weeks to roll into months.

The timelines for due diligence, just as for any project, are important. Use Gantt charts or even user-friendly technology like Trello to guide you through the tasks. There will be bottlenecks and hold ups along the way. This goes with the territory.

But you would be wise to remember the adage long used by practitioners of due diligence: “whatever drags gets dirty.” 

track progress

6. Interview Stakeholders

If the reasoning behind due diligence could be summed up in a few words, they would be:

“don’t take the seller’s word at face value.”

It’s not to say that they’re being dishonest - they may just have a different perspective to your own. In keeping with this, it’s useful to obtain as many objective opinions as possible.

Talk to the company’s suppliers and vendors, their customers, competitors, and even, if applicable, companies that they’ve been involved in disputes with.

The third party perspective will give you a better handle on who it is that you’re buying into. Companies whose competitors speak highly of =are rarely a bad investment. 

7. Conduct Regular Reviews

The best due diligence processes conduct regular reviews. That is, once a week for longer due diligence processes, and perhaps every couple of days for shorter ones.

The findings disclosed during these reviews will inform where the rest of the due diligence process goes (or indeed, if the process even should go ahead). The new information along the way will also inform an updated value of the target company.

Also, remember that time is money, for you and the target company.If material information has been discovered that compromises the valuation that you’ve agreed to, let them know right away, saving you the effort of finishing due diligence if they don’t want to accept a transaction at a lower valuation.

8. Assess Strategic Fit

The previous steps all feed into the strategic fit. It’s important to be objective. In step 7, for example, we noted how information disclosed could lead to a lower valuation. Be conservative with these valuations.

The further into a due diligence process a company gets, the closer they get to the finish line, the more tempting it becomes to complete the deal. Due diligence should be seen as an investment in itself, not a cost.

Your aim is to become better informed and to add value for your M&A process.

The best way to do this is an honest and frank assessment of strategic fit with the target company using all of the information that you’ve required.

Conclusion

Structure is everything in due diligence. Minimize the ad libbing and plan everything from the outset, only veering away from the plan when something unexpected arises. This ensures that you get through the process in an efficient and organized manner.

Talk to DealRoom today about how our due diligence solutions can be a valuable asset for your company in this process.

request a demo

The important role that due diligence plays in successful M&A transactions is by now well established.

Everybody is aware of the various components of due diligence and how they relate to a target company’s functions. Articles on financial due diligence, operational due diligence all contribute to a better knowledge of the process.

This article does not seek to add to this literature. Rather, it seeks to provide practitioners with a set of steps - a framework for successful due diligence that DealRoom has seen the best practitioners use.

These companies essentially know where their due diligence process is headed before it even starts. They begin with technology. 

1. Employ Superior Technology 

There is no excuse to not use technology in the due diligence process. This begins with hiring a specialised due diligence tool.

DealRoom provides services in this area together with pre-built diligence templates that help start the process easier, but its solution is just one of several on the market that offer a flexible, quality service.

It would be wise to shop around and see what specifically fits your due diligence requirements. Depending on the target company profile, you may also invest in technology such as auditing or document scanning software.

These tools aren’t always cheap, but more often than not, they represent a good investment in the due diligence process. 

master due diligence playbook

2. Develop Hypotheses

Developing some hypotheses about the target company is a good short-cut to getting to the issues quickly. Each part of due diligence (financial, operational, compliance, etc.) will have its own hypotheses.

These do not have to be rigidly adhered to, but rather seen as a roadmap of where your team would like to take the process. So, for example, if a company’s revenues are mostly earned abroad, your hypothesis might focus on some issues in countries that have a poor track record on contract enforcement or perhaps even some geopolitical issues.

Again, at this stage, it’s still just broad brushstrokes. 

3. Make an Overview of the Process

Development of the hypotheses will ultimately feed into a broader overview of the process. This is where technology comes into its own. As you divide your working environment into separate categories of due diligence, DealRoom enables users to create requests along the way.

For example, every due diligence process will require audited financial statements, so obtaining these documents would be one of the requests in the financial due diligence section.

due diligence financial

Each company will have a different process, depending on its industry and its specifics, meaning that the overview is important.

Technology firms will obviously focus more on technology due diligence, and this in turn would then break into further components (software stack, processes, IP, etc.). 

4. Assign Responsibilities

Knowing who will be responsible for what before the due diligence process begins is a crucial component in getting the job done right.

If your legal team doesn’t have sufficient expertise in an area, say, foreign law or IP regulation, ensure that you hire third parties that can do the job properly.

Depending on the scale of the target company, you may also need to draft in forensic accountants, for example. Having the right people in place for each task may be the most important part of all for the due diligence process, because the right people will identify issues even when the process you have designed could have overlooked them. 

5. Create a Timeline / Track Progress

This seems like an obvious one, but with so many overlapping components in the due diligence process, it’s easy for weeks to roll into months.

The timelines for due diligence, just as for any project, are important. Use Gantt charts or even user-friendly technology like Trello to guide you through the tasks. There will be bottlenecks and hold ups along the way. This goes with the territory.

But you would be wise to remember the adage long used by practitioners of due diligence: “whatever drags gets dirty.” 

track progress

6. Interview Stakeholders

If the reasoning behind due diligence could be summed up in a few words, they would be:

“don’t take the seller’s word at face value.”

It’s not to say that they’re being dishonest - they may just have a different perspective to your own. In keeping with this, it’s useful to obtain as many objective opinions as possible.

Talk to the company’s suppliers and vendors, their customers, competitors, and even, if applicable, companies that they’ve been involved in disputes with.

The third party perspective will give you a better handle on who it is that you’re buying into. Companies whose competitors speak highly of =are rarely a bad investment. 

7. Conduct Regular Reviews

The best due diligence processes conduct regular reviews. That is, once a week for longer due diligence processes, and perhaps every couple of days for shorter ones.

The findings disclosed during these reviews will inform where the rest of the due diligence process goes (or indeed, if the process even should go ahead). The new information along the way will also inform an updated value of the target company.

Also, remember that time is money, for you and the target company.If material information has been discovered that compromises the valuation that you’ve agreed to, let them know right away, saving you the effort of finishing due diligence if they don’t want to accept a transaction at a lower valuation.

8. Assess Strategic Fit

The previous steps all feed into the strategic fit. It’s important to be objective. In step 7, for example, we noted how information disclosed could lead to a lower valuation. Be conservative with these valuations.

The further into a due diligence process a company gets, the closer they get to the finish line, the more tempting it becomes to complete the deal. Due diligence should be seen as an investment in itself, not a cost.

Your aim is to become better informed and to add value for your M&A process.

The best way to do this is an honest and frank assessment of strategic fit with the target company using all of the information that you’ve required.

Conclusion

Structure is everything in due diligence. Minimize the ad libbing and plan everything from the outset, only veering away from the plan when something unexpected arises. This ensures that you get through the process in an efficient and organized manner.

Talk to DealRoom today about how our due diligence solutions can be a valuable asset for your company in this process.

request a demo

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