Due Diligence
Once your client has selected the target to acquire, both the client and the attorney need to do some due diligence. This means that you have to research the target. What do you look for? I can’t answer that absolutely because deals differ, but I always looked for anything that may negatively or positively impact my client. For instance, once I was sorting through a target’s documents only to find that a patent was due to expire within 9 months, not within 3 years as the target’s management had told us. This was a deal-breaker for my client, and this is why we conduct due diligence. In another instance, I found and flagged a potential environmental issue. I was not sure if it was an issue to the client, but I flagged it and then we looped in environmental experts. Due to this find, we were able to negotiate a lower price to pay for the target.
How do you get the documents? I always started with sending a letter to the potential target’s counsel with a list of everything I wanted to see. You can find these lists easily online. Locate a due diligence list for purchasing a business to familiarize yourself with important documents to request. Remember, you always need to figure out if the target is in good standing. Also, are there any liens on the assets?
Another part of the due diligence process is reviewing the target’s online presence, reviews, reputation, etc. Your client may not want to take on a company that has bad reviews. The reviews can also tip you and your client off if a product is not well regarded.
An accountant should be reviewing the financial statements—past and projections. During this process, everyone is busy. It is important for your client to realize the importance of this process and that it is okay to walk away from a proposed deal.
Entrepreneur and investor, Sieva Kozinsky, has created a guide on due diligence that helps identify which businesses to acquire. He looks at due diligence in an all-encompassing manner, with a look at financial due diligence, operational due diligence, customer due diligence, people due diligence, industry due diligence, seller due diligence, and a business’s growth plan.
Financial due diligence focuses on the financial health of the business and investigates matters such as whether revenue is growing or shrinking and whether to add people and software to the business after acquisition. Operational due diligence requires a look into things such as the systems an owner uses to run the business. Customer due diligence concentrates on questions such as “who are the current customers?” and “how much customer concentration exists?”. People due diligence looks at the crucial people in an organization and who could fill their roles if those people left the business. Industry due diligence involves matters such as finding brokers who have done deals in that industry and using those brokers as resources. Seller due diligence involves honesty and transparency with the seller and recording any “red flags” if they come up during discussions. Lastly, a business’s growth plan is based on assessing the sales process, cross-checking with consultants, acquiring customers, etc.
