Introduction to the Due Diligence Process viii
process by which an acquirer investigates the target to better understand the
business and value proposition and to identify risks related to the business or
the opportunity. An effective due diligence process can save an acquirer time
and money, minimize the potential for buyer’s remorse and provide a frame-
work for mitigating any inherent transaction risk.
What is the purpose of due diligence?
In general, there are three main objectives to the due diligence process: 1)
to gain a working knowledge about the potential target and its operations,
2) to assess the target’s value and 3) to identify risks related to the potential
acquisition (or investment). To meet the various objectives, the acquirer
engages in a fact-finding process to understand the target’s operations or
operating plans, identify possible synergies and discover risks related to the
target’s business. To conduct due diligence on (or “to diligence”—when the
term is used as a verb) a proposed valuation of the target, an acquirer will
review the target’s financial statements, including balance sheets and income
and cash flow statements, and management projections, and less conspicu-
ous evidence of value, including other known liabilities, potential litigation,
insurance coverage, employment and consulting arrangements, regulatory
compliance, material contracts and the target’s intellectual property portfo-
lio. Risks or potential liabilities identified during the due diligence process
can be evaluated and, depending on the particular risk, can be mitigated by
pre-transaction remediation, post-transaction obligations or allocating the
economic risk of such items to one party or the other. Ultimately, a potential
transaction’s financial and strategic success may depend on the quality and
depth of the acquirer’s due diligence process.
How is the due diligence process conducted?
The due diligence process is an examination of the target’s business by the
acquirer and its legal, financial, tax and other advisors. The inquiry usually
takes the form of a set of questions and information requests, often referred
to as the “due diligence request list,” which requires the target to respond to
the acquirer with specific answers or documents. The responses and docu-
ments often are provided in “data rooms” that can be physical locations, but
which, in recent years, have almost universally become secure file sharing
websites to which documents can be uploaded digitally by the target and
accessed remotely by the acquirer and its advisors. Teleconferences and
in-person discussions also can be used to respond to diligence requests, and
targets should be prepared to make their management teams and key per-
sonnel available to answer substantive questions about the business and its
operations. Interviews can be an efficient way for targets to address concerns
raised by the acquirer’s initial diligence findings.
The length of the due diligence process varies based on the size and
complexity of the target’s business and the transaction. The process can take
process by which an acquirer investigates the target to better understand the
business and value proposition and to identify risks related to the business or
the opportunity. An effective due diligence process can save an acquirer time
and money, minimize the potential for buyer’s remorse and provide a frame-
work for mitigating any inherent transaction risk.
What is the purpose of due diligence?
In general, there are three main objectives to the due diligence process: 1)
to gain a working knowledge about the potential target and its operations,
2) to assess the target’s value and 3) to identify risks related to the potential
acquisition (or investment). To meet the various objectives, the acquirer
engages in a fact-finding process to understand the target’s operations or
operating plans, identify possible synergies and discover risks related to the
target’s business. To conduct due diligence on (or “to diligence”—when the
term is used as a verb) a proposed valuation of the target, an acquirer will
review the target’s financial statements, including balance sheets and income
and cash flow statements, and management projections, and less conspicu-
ous evidence of value, including other known liabilities, potential litigation,
insurance coverage, employment and consulting arrangements, regulatory
compliance, material contracts and the target’s intellectual property portfo-
lio. Risks or potential liabilities identified during the due diligence process
can be evaluated and, depending on the particular risk, can be mitigated by
pre-transaction remediation, post-transaction obligations or allocating the
economic risk of such items to one party or the other. Ultimately, a potential
transaction’s financial and strategic success may depend on the quality and
depth of the acquirer’s due diligence process.
How is the due diligence process conducted?
The due diligence process is an examination of the target’s business by the
acquirer and its legal, financial, tax and other advisors. The inquiry usually
takes the form of a set of questions and information requests, often referred
to as the “due diligence request list,” which requires the target to respond to
the acquirer with specific answers or documents. The responses and docu-
ments often are provided in “data rooms” that can be physical locations, but
which, in recent years, have almost universally become secure file sharing
websites to which documents can be uploaded digitally by the target and
accessed remotely by the acquirer and its advisors. Teleconferences and
in-person discussions also can be used to respond to diligence requests, and
targets should be prepared to make their management teams and key per-
sonnel available to answer substantive questions about the business and its
operations. Interviews can be an efficient way for targets to address concerns
raised by the acquirer’s initial diligence findings.
The length of the due diligence process varies based on the size and
complexity of the target’s business and the transaction. The process can take