Due diligence is the common term for the question and answer (Q&A) portion of a transaction, a voluntary investigation in virtually every M&A. Although there are many reasons for companies to combine (including diversification, acquisition of assets and value creation, among others) and multiple flavors of M&As, the need (and process) for due diligence remains basically the same, regardless of reason, type of merger or industry, for that matter.
Virtually every instance of an M&A involves an audit or investigation of factors that affect the terms and conditions of the merger. This allows the buyer (known as the acquiring company) to examine any and all pertinent information on the company it is planning on acquiring (known as the target company.) This information includes financial, legal, contractual and other important data, as all of these factors have an impact on the terms of the deal — or whether the transaction is a good idea at all.
Vendor due diligence (commonly abbreviated as VDD) is used for sell-side diligence. VDD is an independent review of the company that is coming up for sale, and in recent years has been commonly initiated by the sellers themselves to more efficiently work through the M&A process. This deep dive presents the pertinent issues (mostly financial and legal) that will help the acquiring company make a sound business decision.
The due diligence process is usually the most time-consuming part of any merger. On paper it looks fairly routine, but it definitely falls under the heading “simpler in theory than practice.” That’s because there are many moving parts to the process, and each one is as important as the next. These include:
- Goals: Defining exactly what is the endgame. Knowing that will allow you to pinpoint exactly what you need to know about the target company and whether it’s a good fit.
- Financial analysis: Auditing the financial records gives the acquiring company a picture of the target company’s fiscal health. This part of the vendor due diligence process involves inspection of balance sheets and income statements, forecasts and projections, tax documentation, all stock history and options, as well as revenue and profit trends.
- Document inspection: Other documentation, including business, legal and other compliance documents, is scrutinized. This process allows the buyer to gain a full understanding of the target firm, its business practices and culture, and to spy any red flags that might’ve been missed otherwise.
- Business plan: This is where the buyer examines the target’s business plan and model. This step assesses how good the merger should be for the acquiring company.
- Risk management: The step where any and all risks of the merger are examined and factored into the terms of the transaction.
How to Streamline The Process
The due diligence process should start as soon as you’ve decided there is going to be a transaction of some sort. Spotting any potential red flags early in the game can be a real time saver, as it gives the target company the opportunity to correct any issues that are found. Getting an early start also allows the acquiring company to get its documentation in place. In addition, communication lines between the deal’s sales team and the due diligence team need to be open, so that all parties are reading from the same page.
Ensure the Proper Workflows and Documentation Are In Place
In addition to all of the information already mentioned, confirm that the following things are in place:
- Document organization: All the relevant documents are sorted into appropriate categories and well indexed.
- Completed review: All documents have been thoroughly reviewed and all red flags identified.
- Redaction: Any information that needs to be redacted, such as for regulatory or compliance-related reasons (maybe for the GDPR [General Data Protection Regulation]), has been properly handled.
Plus, confirm that all documents are current and that there is no fabrication of any numbers or timelines. In addition, top-tier security needs to be implemented in all phases of the process. Performing risk mitigation (actions taken to lessen the company’s exposure to risks, which includes identifying, analyzing and mitigating) during the process.
Financial and legal documentation: Having experts on your team to analyze these types of documents is crucial. In most instances, third parties are brought in to manage this part of the deal. These consultants provide an invaluable service, as they are able to drill deep into these areas and obtain the bottom-line data that will ensure the success of the transaction.
How Can CapLinked Help This Process?
Any M&A, along with the due diligence process that it inevitably entails, requires a secure, online location where the companies involved can store and share (with the appropriate credentials) the required documentation. This location, known as a virtual data room (VDR), contains the tools and features necessary for successful due diligence. These tools include high-level admin controls, document and version management, multiple layers of security and 24/7 customer support. Caplinked’s user-friendly interface and ability to update and edit files from virtually any part of the globe helps the most time-intensive part of an M&A proceed more quickly. Reach out or begin your free trial today to see how Caplinked can take your vendor due diligence process to the next level.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.