Mergers and Acquisitions

Chapter 4. Preparing for and Executing Due Diligence ^[1]

Introduction

Once preliminary agreement has been reached and a letter of intent (LOI) has been executed, the process proceeds to the due diligence phase. Due diligence refers to evaluative measures employed by an acquiring company to:

• Validate financial, legal, and business representations made by an acquisition candidate.

• Validate the acquirer's assumptions and expectations regarding the future performance of the business.

• Assess the quality of the target company's management, staff, technology, and operations.

For the vast majority of transactions, these evaluations are an indispensable component of the acquisition process. They will either confirm or modify the acquiring company's estimation of the acquisition candidate's value, and, ultimately, they will mitigate the risks associated with what is almost invariably a significant potential investment.

Due diligence, by definition, is ambitious in scope. Given the time constraints under which due diligence is generally conducted (typically, less than 10 days in duration), it is critically important that the process is properly staged, effectively organized, and efficiently conducted. Accordingly, this chapter discusses measures and procedures that enhance the efficiency and effectiveness of that process.

By far, the most common type of acquisition transaction is that of smaller, privately held businesses by midsize and large companies. This discussion, therefore, focuses on the ...