Best Practices to Prepare for M&A Due Diligence

10 March, 2022

Due diligence is a buyer’s detailed investigation into the affairs of your company before they acquire it. But, assuming that due diligence is a one-sided process performed only by entities looking to buy companies can be a fatal mistake. The reality is that being prepared for the due diligence process, long before an exit is anticipated, will not only make you look more attractive to potential buyers, but will also maximize the value of your company and expedite the transaction timeline.

successful merger Conversely, responding to the rigorous demands of the due diligence process when a buyer is already at the door puts an incredible demand on you and your resources and can give a buyer the perception that you are unprofessional, as well as that there may be operational difficulties in your company.

Why Businesses Rely On Data Rooms

When your company is well-prepared for the exit process it means that everything a buyer will want to scrutinize—contracts, employee records, customer agreements, compliance documentation, HR and IP issues, etc.—is accurate, up-to-date, and organized in a way that makes it easy to review. Exit readiness is really about creating, gathering, organizing, and maintaining all the data that a potential buyer will want to scrutinize before buying your company. Having this information assembled and organized in a state-of-the-art virtual data room is the ideal way to be prepared.

A data room that is online, indexed, secure, and fully searchable allows buyers to easily locate and view the content needed to perform due diligence and make an informed decision about whether to acquire your company. But this activity also has a very real advantage to you as a seller. Because buyer activity in the virtual data room is fully trackable, sell-side managers have the ability to analyze buyer behavior and assess interest levels.

Such intelligence can reveal important information about a buyer’s areas of focus and concerns and enable the seller to adjust negotiating strategies if need be. It can also inform the seller of key questions the buyer might raise when meeting face to face.

Best Practices for M&A Due Diligence

Here are a few tips and best practices to facilitate M&A due diligence of your company.

Start With a Due Diligence Checklist

When a potential buyer assesses your company they will want to fully understand your financial, legal, operational, technical and HR affairs—in other words, everything. Put yourself in the buyer’s shoes and anticipate what they will want to know. Most buyers will provide you with a due diligence checklist, but don’t wait; get a sample due diligence checklist now and ensure that company records are up-to-date and organized.

Ideally, everything necessary for the due diligence process should be able to be organized in a virtual data room over the course of a weekend, if not in hours. Not only is this necessary in the event of an acquisition, it’s also a valuable discipline to maintain as your company grows.

Stage the Sharing of Sensitive Information

Buyers want to fully understand every aspect of your business. They will ask for information about your products, customers, sales pipeline, financial statements, technology, personnel and everything else. And, while the diligence process is about transparency and full disclosure, it’s important to understand that as a seller your job is to disclose the information necessary for a buyer to make a decision, but at the same time protect your intellectual property.

You can expect the buyer to show a commitment to the transaction commensurate with the volume and sensitivity of the information they request. Generally, manufacturing processes and unpublished patent applications won’t be shared until it becomes clear that the partner is serious enough to merit it. A virtual data room is ideally suited for staging the sharing of information in this way.

Address Liabilities

Are there any lawsuits or threats of litigation that could surface during the due diligence process? Threats of litigation are major red flags for buyers, however, it’s not uncommon for the owner's of the selling company to be unaware of litigation exposures until the due diligence process reveals them. These exposures can be associated with ex-employees, past or present customers, vendors, intellectual property issues, and can even be related to company practices that are no longer in use.

Unresolved litigation will reduce deal value and should be dealt with well before a buyer shows interest. Once the due diligence process has started, unresolved litigation is much more difficult and costly to address and will delay and potentially kill a deal. Review unresolved and potential litigation with an attorney, put the relevant documents into your data room, and resolve issues before they affect how attractive your company looks to a buyer.

Hold the Buyer’s Hand

During the due diligence process the buyer is attempting to learn and appreciate in weeks something that it took you years to create. It’s your job to facilitate the due diligence process. Don’t be afraid to guide the buyer through the learning curve. If there are requests for missing data, respond promptly.

You gain great credibility with a buyer and give them much comfort about the quality of your business when your respond to their due diligence requests in an organized, detailed and complete manner. This is another great advantage of a virtual data room; if a buyer requests more information, you can provide it to them in a matter of minutes.

Wrap Up

In this article, we recommended some of the best practices for seamless M&A due diligence. There are many other factors involved in the due diligence process that may vary from one industry to another. However, the aforesaid practices can be generalized irrespective of the industry you’re operating in.

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