A General Introduction to Due Diligence: Look Before You Leap ix
as little as days to complete or, alternatively, it can span months leading up to,
and during the negotiation of, a transaction. The questions and information
requests posted by an acquirer in a proposed transaction cover a wide array of
topics and may be provided directly by the acquirer or indirectly by its legal
and financial advisors. Often, the back-and-forth between the acquirer and
its advisors, on the one hand, and the target, on the other, will continue until
the acquirer is comfortable that it has adequately investigated the target, as
evidenced by a thorough understanding of the target’s business and satisfac-
tory responses to all of its due diligence questions and follow-up questions.
What is the scope of the due diligence process?
As noted above, the due diligence inquiry’s scope can be broad or narrow,
depending on the transaction and the target, and it often will cover a wide
array of topics. Common factors influencing the scope of the diligence pro-
cess include the type of transaction and deal structure (i.e., stock purchase,
asset purchase, strategic investment, financial investment, partnership, etc.),
the relevant industry, whether the target has international activities, the
existence of known issues and cost and time constraints. For example, the
person buying the bicycle might ask the manufacturer questions about the
materials used in the bicycle’s frame and may request the results of any stress
testing conducted on the frame, which could provide evidence of the frame’s
durability or reveal a disadvantage of the bicycle in question. In the context
of a business acquisition or an investment, the due diligence request list will
likely be lengthy and address various aspects of the target’s business, includ-
ing, but not limited to:
• structure and background
• capitalization
• finances and accounting
• real and personal property
• litigation
• environmental compliance
• business practices (e.g., sales and distribution, marketing, warranty
and product liability issues, etc.)
• contracts
• regulatory compliance
• employment/labor matters
• management matters
• affiliate transactions
• insurance matters
• intellectual property
A target should be prepared to provide copies of all its important documents.
The review of the responses to the due diligence request often is
handled by a multi-disciplinary team including the acquirer and its legal,
financial, tax and other advisors. In particular, the legal team will often
as little as days to complete or, alternatively, it can span months leading up to,
and during the negotiation of, a transaction. The questions and information
requests posted by an acquirer in a proposed transaction cover a wide array of
topics and may be provided directly by the acquirer or indirectly by its legal
and financial advisors. Often, the back-and-forth between the acquirer and
its advisors, on the one hand, and the target, on the other, will continue until
the acquirer is comfortable that it has adequately investigated the target, as
evidenced by a thorough understanding of the target’s business and satisfac-
tory responses to all of its due diligence questions and follow-up questions.
What is the scope of the due diligence process?
As noted above, the due diligence inquiry’s scope can be broad or narrow,
depending on the transaction and the target, and it often will cover a wide
array of topics. Common factors influencing the scope of the diligence pro-
cess include the type of transaction and deal structure (i.e., stock purchase,
asset purchase, strategic investment, financial investment, partnership, etc.),
the relevant industry, whether the target has international activities, the
existence of known issues and cost and time constraints. For example, the
person buying the bicycle might ask the manufacturer questions about the
materials used in the bicycle’s frame and may request the results of any stress
testing conducted on the frame, which could provide evidence of the frame’s
durability or reveal a disadvantage of the bicycle in question. In the context
of a business acquisition or an investment, the due diligence request list will
likely be lengthy and address various aspects of the target’s business, includ-
ing, but not limited to:
• structure and background
• capitalization
• finances and accounting
• real and personal property
• litigation
• environmental compliance
• business practices (e.g., sales and distribution, marketing, warranty
and product liability issues, etc.)
• contracts
• regulatory compliance
• employment/labor matters
• management matters
• affiliate transactions
• insurance matters
• intellectual property
A target should be prepared to provide copies of all its important documents.
The review of the responses to the due diligence request often is
handled by a multi-disciplinary team including the acquirer and its legal,
financial, tax and other advisors. In particular, the legal team will often