Introduction to the Due Diligence Process x
include corporate lawyers and specialists in various subject matters, includ-
ing real estate, litigation, environmental matters, labor and employment
matters and regulatory matters. Frequently, the acquirer itself will handle the
due diligence of the target’s business plan and sales and marketing matters
and will rely on its accountants and tax advisors to review the target’s finan-
cial information.
What is the result of the due diligence process?
For the reasons outlined above, the due diligence process can be long and
complicated, and it often involves dozens of individuals working many hours
on behalf of the acquirer. Those efforts are generally reduced to written find-
ings and conclusions and compiled into what is referred to as “due diligence
memorandum” or “diligence reports.” The due diligence memorandum is
primarily for the acquirer’s use, but it also may be provided to certain third
parties for specific analysis or advice.1 Those diligence reports contain key
findings and often highlight potential areas of concern regarding the target.
However, the formal diligence report, while a tangible byproduct of
the due diligence process, is typically not regarded as the “result” of the
diligence process. The result of the due diligence process is often subtlety
reflected in one form or another in the consummated transaction—or not
so subtlety reflected, in the event the transaction is abandoned because of a
fact or circumstance uncovered during the due diligence process. Acquirers
can use due diligence findings in many ways, but this intensive process
often results in one or more of three potential outcomes: confirmation of
the acquirer’s understanding of the target, reduction to the purchase price
(or valuation) and the inclusion of provisions in the definitive transaction
document, allocating certain business risks to the target, as opposed to the
acquirer (typically via indemnification obligations).2 In the latter cases, the
acquirer is using the information discovered during the diligence process to
negotiate more-favorable—or more-appropriate—terms for the transaction.
Of course, it is also possible that something discovered during the diligence
process will cause the acquirer to walk away from the transaction, which
highlights the overall importance of the due diligence process.
Whether buying a bicycle or a business, knowledge is power, and the
due diligence process is a valuable information-gathering tool. A thorough
and thoughtful due diligence process can help a potential acquirer decide
whether to pursue a proposed transition and, if so, on what terms.
References
1. Depending on the nature of the transaction, the acquirer may be working with lenders (in
a leveraged buyout transaction, for example) or insurance underwriters (if representation
and warranty insurance are being procured). In such cases, the acquirer’s legal counsel
should be consulted to assess attorney-client privilege, confidentiality and reliance issues
before sharing any work product with such third parties.
2. A fourth possible, but less common, outcome is for the target to undertake predetermined
remedial measures prior to the consummation of the proposed transaction.
include corporate lawyers and specialists in various subject matters, includ-
ing real estate, litigation, environmental matters, labor and employment
matters and regulatory matters. Frequently, the acquirer itself will handle the
due diligence of the target’s business plan and sales and marketing matters
and will rely on its accountants and tax advisors to review the target’s finan-
cial information.
What is the result of the due diligence process?
For the reasons outlined above, the due diligence process can be long and
complicated, and it often involves dozens of individuals working many hours
on behalf of the acquirer. Those efforts are generally reduced to written find-
ings and conclusions and compiled into what is referred to as “due diligence
memorandum” or “diligence reports.” The due diligence memorandum is
primarily for the acquirer’s use, but it also may be provided to certain third
parties for specific analysis or advice.1 Those diligence reports contain key
findings and often highlight potential areas of concern regarding the target.
However, the formal diligence report, while a tangible byproduct of
the due diligence process, is typically not regarded as the “result” of the
diligence process. The result of the due diligence process is often subtlety
reflected in one form or another in the consummated transaction—or not
so subtlety reflected, in the event the transaction is abandoned because of a
fact or circumstance uncovered during the due diligence process. Acquirers
can use due diligence findings in many ways, but this intensive process
often results in one or more of three potential outcomes: confirmation of
the acquirer’s understanding of the target, reduction to the purchase price
(or valuation) and the inclusion of provisions in the definitive transaction
document, allocating certain business risks to the target, as opposed to the
acquirer (typically via indemnification obligations).2 In the latter cases, the
acquirer is using the information discovered during the diligence process to
negotiate more-favorable—or more-appropriate—terms for the transaction.
Of course, it is also possible that something discovered during the diligence
process will cause the acquirer to walk away from the transaction, which
highlights the overall importance of the due diligence process.
Whether buying a bicycle or a business, knowledge is power, and the
due diligence process is a valuable information-gathering tool. A thorough
and thoughtful due diligence process can help a potential acquirer decide
whether to pursue a proposed transition and, if so, on what terms.
References
1. Depending on the nature of the transaction, the acquirer may be working with lenders (in
a leveraged buyout transaction, for example) or insurance underwriters (if representation
and warranty insurance are being procured). In such cases, the acquirer’s legal counsel
should be consulted to assess attorney-client privilege, confidentiality and reliance issues
before sharing any work product with such third parties.
2. A fourth possible, but less common, outcome is for the target to undertake predetermined
remedial measures prior to the consummation of the proposed transaction.