Middle Market M & A, 2nd Edition

CHAPTER 16Due Diligence

This chapter provides an overview of some of the basic aspects of traditional due diligence as applied to mergers and acquisitions, including background, process, and participants.

Regardless of whether an acquisition is being undertaken by a financial buyer (i.e., private equity) or a strategic buyer, or an investor or lender, the ultimate goal behind every acquisition is to generate a return commensurate with the expected level of risk. Because private transactions are initially assessed with limited information, significant assumptions must be made regarding the quality of the target at the onset of a negotiation. These initial assumptions must be confirmed or clarified before the acquirer can feel confident completing the transaction as proposed. This process is referred to as due diligence.

Because each transaction has different goals and objectives, these matters greatly affect the focus and extent of due diligence to be undertaken. The due diligence process is often the acquirer's first opportunity to conduct an in‐depth analysis and investigation of the financial, tax, legal, and operational aspects of a target's business. When properly executed, these efforts may reduce the overall transaction risks faced by the acquirer, and will inform negotiations related to allocating risk in the purchase agreement.

From the seller's perspective, it is often desirable to share some information as part of exploratory due diligence before negotiating the letter ...