Reply To: "Speedy" DD

#107875

Korath Wright
Participant

Due Diligence is only rushed relative to the projects risks. A seemingly long DD process can be more rushed than a shorter one, if the risks it is accounting for are proportionately larger. There are several main risk adjustments to consider in this case:

1. Management Buy Out. The Board of Directors members orchestrating the buy-out have access to privileged information about the target, reducing certain performance risks. Additionally the culture shock maybe low and the transition may even increase motivation depending on incentive structures.

2. Pricing. The MBO is a lower price transfer channel, reducing the risk of the transaction for the buyer. As well, a rushed transfer, depending on the direction of pressure to complete the deal, can reflect positively on the price paid for the buyers and further reduce their risk. Depending on the relative size of a buyer compared to a target, the price may not represent a significant risk regardless.

3. Reps and Warranties. Some areas where adequate due diligence can not be completed, risks can be mitigated through clauses in the SPA including representations, warranties, covenants, indemnifications, closing conditions, post-closing price adjustments, use of an escrow, etc. This does not include WI insurance, which instead covers unknown risks, and is not a replacement for lack of Due Diligence or poor target performance post-deal.

Depending on the projects requirements, and in certain scenarios where lower risk can be attained through other means, a faster Due Diligence could have an acceptable risk profile for stakeholders.

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