Due Diligence
May 23rd, 2008A few posts ago I wrote about the Term Sheet and the role it plays in an acquisition/merger. In the post before that I wrote about generally being excited about things in my world and my last post talked about picking the right partner to potentially merge with. So just for grins, let’s touch upon the due diligence. If you want an official definition of due diligence then go to Wikipedia or Webster or Investopedia.
Once a Term Sheet or Letter of Intent (LOI) is executed between two potential merger partners, you typically enter a phase where you do more thorough due diligence. This is where each partner can verify and validate that the information provided to them by the other party is accurate. Remember, this information was initially used by each partner to frame up the terms of the deal they want to complete. So if there are any skeletons in the closet for either party, due diligence helps uncover that information. Hmmm, maybe that statement is not the best way to state what I mean. Due diligence helps each party feel good about the deal they are about to make. That is a little more glass is half full. If something comes up that is unexpected, it may become a point to be re-negotiated for the final merger/acquisition agreement. If the parties can not come to agreement on new modified terms caused by inaccuracies uncovered during due diligence then typically they can decide to walk away from doing the transaction.
The duration and depth (amount of detail) of due diligence depends on lots of factors. Some simple ones are things like how big is the transaction? What is the amount of risk involved? How well are the financials for each company maintained? Have the companies followed Generally Accepted Accounting Principles (GAAP)? What contractual obligations exisit that the other party should know about? It can, and should, also include doing diligence on the management team members, company strategy and growth plan. And the list goes on. There are many companies that make their living doing nothing but helping companies do proper due diligence.
So I will finalize this post by restating that I feel really positive about some of the potential options I see at this point. I also realize that these options are not destinations but instead just another step on the path of the journey we are on.
