To DD or not to DD – surely there is no question?
The critical importance of due diligence has been thrust firmly into the spotlight recently.
Many potential acquirers consider due diligence a necessary evil in the process of buying a firm or client book. But instead of a check-box exercise, we suggest this process is embraced on both sides and turned into a value-add.
Obviously, it’s important for the acquirer to understand exactly what they’re buying and the nature of any liability they will be taking on as part of the purchase.
This knowledge and understanding may help to shape the deal in terms of whether a share or asset purchase is completed and could also impose requirements that need to be fulfilled during the earn-out period. There are lots of ways to protect both parties that don’t necessarily hinge on negotiating down the purchase price.
Due diligence should be treated as an open and honest sharing of information - not a blatant opportunity for the buyer to reduce the price. This process sets the tone for your future working relationship – if you have an earn-out period this could be a long time, so treat it as an opportunity to get off to a good start.
It’s as Important to Know What Comes Next as to Know What Happened Before
Due Diligence is not and should not be restricted to the Buyer – the Seller should also conduct their own due diligence on a potential acquirer.
After all, selling your business is not just about securing the best price – it’s about what happens to your clients, your staff, your offices and you after the deal is concluded.
Do your homework – speak to planners and back-office staff who currently work in the acquiring firm and also to other firms who have been acquired if possible. What will life be like post-deal and what will the day to day expectations be.
Avoid Unexpected Shocks
Due diligence is the start of a long term relationship between many parties – the principals, planners and back-office staff, not to mention the clients.
Whilst not everyone will need to know the details of the commercial aspects of the deal it is important to remember to bring everyone on the journey. Involving them early on will make for a smoother transition in the long run and avoid Chinese Whispers in the short term. Generally, it’s difficult to keep things from the staff in a small to medium-sized firm and most will immediately think the worst – so share what you can when you can to keep conjecture to a minimum.
Consult an Expert
Due diligence templates are readily available, but it isn’t just knowing what to ask but understanding the answers that’s important. Employment contracts, lease agreement, file reviews and IT integration are just a few areas where you may need additional help.
In addition, a templated approach might not be appropriate depending on the type of deal – asset purchase, share purchase, joint venture, AR – all have different pros and cons and may need a more tailored approach.
In summary, know what you’re buying, protect both parties, bring everyone on the journey by being as open as possible, do your research and consult the experts.
If you would like any further information or assistance with your due diligence requirements then please feel free to get in touch.