2013 has seen welcome signs of an upturn in merger and acquisition activity both in the North West and across the UK. With acquisitions tentatively on the rise, it is extremely important to focus on making sure the Due Diligence exercise in every purchase is managed properly; from start to finish. Conducting thorough and appropriate Due Diligence will save any acquirer money and time in the future. However, professional costs are still being squeezed which means that some purchasers are looking at ways of saving money on a deal. One way has been to compromise on Due Diligence but this option can have devastating results and cost dearly in the long run.
For reference, there are primarily two types of Due Diligence: Financial and Legal. On the financial side, as well as the usual stakeholders on the buyer’s side, any funders – both banks and private equity houses – must also be satisfied. In general terms, Financial Due Diligence seeks to assess the risks and opportunities associated with the transaction in hand by reviewing the underlying profits of the business as well as its assets and liabilities going forward. This area of Due Diligence will – of course – have a bearing on the price paid for the target company, as well as other commercial issues so it cannot (to use a not very technical term) be ‘fudged’!
After the Financial exercise, Legal Due Diligence is usually done remotely by way of a questionnaire. It largely seeks to identify exposures and risks in acquiring the target company as well as its merits and strengths. The primary focus of the queries raised will also depend on the sector of the target and its key assets.
Typically, the Legal Due Diligence exercise will encompass the following areas: property & environmental issues; employment matters; contractual issues (including the terms & conditions of the target); the target’s customers & suppliers; intellectual property issues; along with any Pension issues. It is vital this part of the process is done properly as it will assist in identifying the areas of protection that are required and – indeed – whether the acquirer wants to proceed with the purchase at all and on what terms.It is essential that there is joined up thinking when conducting both Financial and Legal Due Diligence exercises. Whilst the Buyer will need to correctly identify the relevant exposures, duplication should be avoided as this will often unduly irritate the Seller. Therefore, good communication between the authorised personnel of both sides is vital. The key priority should be to minimise any disruption to all parties involved in the transaction; particularly as most Buyers will want to hit the ground running. Our advice is for both sides to check that proper and regular communication is happening by asking questions and pushing for updates at every single stage. The Due Diligence process must be managed effectively. This kind of oversight has often been a fatal – and sadly preventable – error that has caused a deal to lose momentum or even fail unnecessarily.
Over recent months, we have seen more and more clients who have failed to complete Due Diligence properly – often without ensuring the core information of the deal is accurately compiled including the basics like issues relating to key client contracts. These factors have also meant that there has been a sharp rise in the number of professional negligence cases being brought related to mergers and acquisitions. The cases we have been primarily handling are against lawyers and accountants and again most could easily have been prevented.
In short, compromising on Due Diligence – or taking your eye off the ball during a deal – is very much a false economy; from both a financial and time management perspective. As the saying goes ‘prevention is most certainly better than cure’.