The information collected and discovered during due diligence is vital to a deal’s success. The process is comprehensive and teams need innovative software to productively complete diligence. Here is everything you need to know about due diligence, what steps to take, and how DealRoom can help.
Due diligence is the thorough analysis of a commercial business, done typically by a potential buyer prior to business transactions. Common examples are in preparation for mergers and acquisitions (M&A) or purchasing new facilities. In order to complete investigation, specialized teams collaborate to compile and review data including:
Due diligence in M&A is a lengthy and intimidating process that involves multiple parties and phases. Listed are general due diligence process steps.
1. Evaluate Goals of the Project - As with any project, the first step delineating corporate goals. This helps pinpoint resources required, what you need to glean, and ultimately assure alignment with the firm’s overarching strategy. This involves introspective questions revolving around what you need to gain from this investigation.
2. Analyze of Business Financials - This step is an exhaustive audit of financial records. It ensures that documents depicted in the Confidentiality Information Memorandum (CIM) were not fluffed. Additionally, it helps gauge the company’s asset health, asses overall financial performance and stability, and detect any red flags. Items inspected here include:
3. Thorough Inspection of Documents - This step begins as a two-way conversation between buyer and seller. The buyer asks for respective documents to audit, conducts interviews or surveys with the seller, and goes on site visits. Responsiveness and organization on the seller’s end are key to expedite this process. Otherwise, it may create an arduous experience for the buyer.
Following, the buyer examines the information collected to ensure proper business practices as well as legal and environmental compliances. Overall, the buyer gains a better understanding of the firm as a whole and can better appraise long term value.
4. Business Plan and Model Analysis - Here, the buyer looks specifically at the target company’s business plans and model. This is to assess whether it is viable and how well the firm’s model would integrate with theirs.
5. Final Offering Formation - After information and documents are gathered and examined, individuals and teams collaborate to share and evaluate their findings. Analysts utilize information collected to perform valuation techniques and methods. This substantiates the final dollar you are willing to offer during negotiation.
6. Risk Management - Risk management is looking at the target company holistically and forecasting risks that may be associated with the transaction.
While road mapping, it may seem difficult to forecast how much due diligence is enough. Despite its comprehensive nature, the process should only last between 30 and 60 days. This is achievable if delegated to an efficient, dynamic team from multiple business functions. Ultimately, you want to close the deal as soon as possible, while also being thorough.
But, in reality, it is impossible to uncover all issues and potential complications during the investigation. Some items will not be uncovered until integration. However, the same idea applies to potential benefits. This reinforces the importance to be energetic and efficient while maintaining quality to meet the due diligence period deadline.
Cultivating good organization and strategizing is key when trying to navigate due diligence and meet the necessary requirements. So you can stay systematic, outlined below is a typical due diligence management folder structure for M&A transactions:
No two M&A deals are the same. Each incorporates its own character of size, business owner and leadership personalities, culture, and industry to create a unique transaction. One factor that makes transactions more complex is when a company is privately held.
Unlike publicly traded companies, private companies are not auctioned and traded conventionally on the stock market. Investors cannot easily buy shares unless they are founders, employed there, or have invested via venture capital or private equity firms. Aside from it being more difficult to invest in private companies, they are not obligated to publicly disclose as much information. Compared to private companies, public companies are also held to stricter business and accounting practice standards.
While buying out privately owned companies and startups may have a high payoff and rewards, they come with distinct complexities. These may affect or hinder the M&A process. To save some headaches down the line, detailed here are some best practices for the private equity due diligence process:
Conducting proper due diligence is an important, yet tedious process. Here are a few helpful tips:
Traditionally, due diligence is completed using a virtual data room, Excel trackers, and one-off emails. Unfortunately, this leaves room for inefficiencies such as version control worries, miscommunication, duplicate work, and information silos.
With DealRoom, all diligence can be managed within the platform. Teams no longer have to switch between multiple platforms and this allows diligence to be completed up to 40% faster. They can effortlessly share information and collaborate internally, as well as externally with clients.
The due diligence process is never easy, but that doesn’t mean it has to be inefficient and disorganized. With the proper software and workflows in place, diligence can be straightforward and productive. After all, the information that is discovered during diligence is critical to a deal’s success. Software like DealRoom, equips teams with the proper tools to be thorough, yet efficient, and to close deals faster.