FREE online courses on Mergers & Acquisitions - Chapter 3 - Making Due Diligence Work

 

Since due diligence is a very difficult undertaking, you will need to enlist your best people, including outside experts, such as investment bankers, auditors, valuation specialist, etc. Goals and objectives should be established, making sure everyone understands what must be done. Everyone should have clearly defined roles since there is a tight time frame for completing due diligence. Communication channels should be updated continuously so that people can update their work as new information becomes available; i.e. due diligence must be an iterative process. Throughout due diligence, it will be necessary to provide summary reports to senior level management.

 

Due diligence must be aggressive, collecting as much information as possible about the target company. This may even require some undercover work, such as sending out people with false identities to confirm critical issues. A lot of information must be collected in order for due diligence to work. This information includes:

 

1. Corporate Records: Articles of incorporation, by laws, minutes of meetings, shareholder list, etc.
2. Financial Records: Financial statements for at least the past 5 years, legal council letters, budgets, asset schedules, etc.
3. Tax Records: Federal, state, and local tax returns for at least the past 5 years, working papers, schedules, correspondence, etc.
4. Regulatory Records: Filings with the SEC, reports filed with various governmental agencies, licenses, permits, decrees, etc.
5. Debt Records: Loan agreements, mortgages, lease contracts, etc.
6. Employment Records: Labor contracts, employee listing with salaries, pension records, bonus plans, personnel policies, etc.
7. Property Records: Title insurance policies, legal descriptions, site evaluations, appraisals, trademarks, etc.
8. Miscellaneous Agreements: Joint venture agreements, marketing contracts, purchase contracts, agreements with Directors, agreements with consultants, contract forms, etc.

 

Good due diligence is well structured and very pro-active; trying to anticipate how customers, employees, suppliers, owners, and others will react once the merger is announced. When one analyst was asked about the three most important things in due diligence, his response was "detail, detail, and detail." Due diligence must very in-depth if you expect to uncover the various issues that must be addressed for making the merger work.