Due Diligence : The process of due diligence (DD) involves investigating potential business partners. Due diligence is a crucial part of any major transaction, such as mergers and acquisitions. It involves carefully examining every aspect of a business. Due diligence is an extensive process and can be quite expensive. In this article, we will outline six simple steps for due diligence, give you access to our checklist, and tell you how to supercharge the process.
M&A due diligence: how do you do it? 1. Documentation : Prospective bidders thoroughly scrutinize every aspect of the target company during due diligence. Their approach involves systematically reviewing all documentation related to each subject, from business plans to real estate to cash flow. All these documents must be prepared by sellers, organized, and made available to bidders in advance. The buyer may not be able to complete due diligence if the documentation has gaps.
2.Virtualize your data : You need a secure environment for organizing and sharing sensitive documents, communicating with and tracking your bidders, as well as tracking the due diligence Q&A process. Secure online environments are available for virtual data rooms. The purpose of virtual data rooms differs from that of conventional file sharing solutions. Virtual data rooms are very easy to set up, regardless of their power and scale.
3. Document sharing : When conducting due diligence, it is essential to disclose critical business information, whether for bidder document reviews or extensive questions and answers. The first step is to share all documents already collected and prepared. Sharing documents with authorized users can be as easy as setting the right reading permissions in a virtual data room; buyers and sellers cannot ask for a simpler tool.
4. Revision of documents: During due diligence, potential bidders will systematically review documents such as confidential financial statements that are shared with them. Due diligence is meant to be thorough; bidders will start preparing questions in advance for the Q&A component. It will be difficult for sellers to control the document review process, but they can take steps to prepare by compiling and organizing all relevant documents beforehand. To complete this stage successfully, this is crucial.
5. Q&A regarding due diligence : The most intense part of the due diligence process is the back-and-forth between bidders and sellers. It is estimated that 70% of deal time can be devoted to Q&A. As part of the due diligence Q&A process, the buyer will ask questions of the seller, who will direct the questions to the right member of the team to answer. Upon approval from the seller, the bidder will receive the answer. Without clear roles and workflows, Q&A can be a complex and time-consuming process with multiple bidders and thousands of documents to ask about. Virtual data rooms make sense for the due diligence Q&A process. It is easier to assign, track, and follow up questions when they are in the same environment as the corresponding documents. When multiple bidders ask questions, this is especially true.
6. Reporting and compliance after due diligence : As part of due diligence, you should be extremely cautious, but being cautious shouldn't stop once the contracts are signed and the deal is closed. As well as complying with any compliance requirements, you must provide a reliable audit trail and provide any proofs of disclosure.
Performing due diligence on a private company : Every M&A deal's uniqueness is influenced by its size, stakeholders, culture, and industry. Having a private company can complicate due diligence and make transactions more difficult. It is harder for investors to buy shares in private companies; they need to be founders, employees, or venture capitalists. Due diligence is more challenging since private companies do not have to disclose as much information publicly as public companies.
It's important to know what to look out for when conducting due diligence on a private company. It is easier to spot gaps in process and compliance with a due diligence checklist, allowing you to have greater confidence in your investment.