M&A Planning and Due Diligence Execution

As with any major asset acquisition, the purchase of a company, or only some of the assets therein, requires a significant planning process. Most companies have a defined approval process for major expenditures, including the description, business justification, financial requirements and expected Return on Investment (ROI). Mergers and Acquisitions, however, often seem to fall outside of this fundamental process. M&A planning begins with the development of the business plan that identifies the strategic rationale for an acquisition of assets or companies. The plan identifies the business purpose, market, size, financing method, and resulting business benefits.

Generally, with asset purchases in the normal course of business, all of the pertinent information is available before the request for approval is prepared. By comparison, much of the final M&A information is not available until after the acquisition process has begun. This information is determined through the initial due diligence inquiry requested from the seller.

The M&A professional usually develops an initial due diligence checklist to solicit information from the potential targets that were identified based on the strategic criteria. Many checklists are available that provide specific questions for the industry/market of the seller, that are beyond the general financial and publicly available data. The emphasis is to obtain sufficient information to determine the finalists in the search, to create a Letter of Interest, and to establish an initial price range if requested. The initial due diligence should be comprehensive, but should not be so exhaustive that it slows down the selection process. A system should be in place to allow comparing and contrasting the information that the Targets provide in response to the Request for Information. The buyer must carefully evaluate the need for certain critical data, if the seller’s information is incomplete or unclear. The latter may result because there is seller’s reluctance to disclose information he deems confidential. He will need to be convinced of its critical nature to the buyer, even if it is in a redacted format.

The seller’s estimates as to revenue growth, market size, competitive position, and technological advantages should also be thoroughly evaluated in order to gage its accuracy. This may require assessing the premises that the seller used in developing the estimates. While the buyer may wish to believe the seller, such estimates should be substantiated by the seller or through a third party references.

The seller should be requested to affirm compliance with financial audit reporting, tax filings and audits for all relevant jurisdictions, the Sarbanes-Oxley Act, the Foreign Corrupt Practice Act, OHSA, and other regulatory requirements. If real estate is part of the transaction, compliance with all Environmental Protection Agency rules should be verified. Legal issues, lawsuits, claims on intellectual property or proprietary processes, and contractual disputes should be explained and defended.

Issues related to the seller’s Balance Sheet should be reviewed, particularly debt covenants and special terms in sales agreements with Change of Control restrictions. Accounts Receivable with high days outstanding should be reviewed for problems with delivery, service issues, or product warranty problems. The seller’s title to all assets should be verified, particularly leased assets.

With accurate answers to the Request for Information and the follow-up clarification questions, the buyer should have a reasonably accurate means for down-selecting the Targets to a list of finalists. Having a good plan at the very beginning and executing on it is the first step to M&A success.

Learn more on how to run a successful M&A on our M&A Management Playbook and Toolkit page.