Due Diligence for Small to Medium Sized deals.

This topic contains 10 replies, has 11 voices, and was last updated by  Esther Persing 6 months, 3 weeks ago.

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    Chris King

    What are the 5 primary areas of inquiry for buy side due diligence on small to medium size deals.

    Deals between $1 million to $10 million in Enterprise value.


    Corynne Pierce

    The areas that I have focused the most are typically around the following:

    1. Finance (accounting, tax, etc)
    2. Legal – Litigation (any litigation pending)
    3. Legal Corporate structure (subsidiaries and legal entities)
    4. IT (Data Privacy and Security and existing contracts)
    5. Product (Whatever the company is being acquired for, all relevant information related to that company or product)
    6. HR – If we plan to retain employment for the target company, we request HR related information near the end of due diligence to ensure we are ready for day 1 integration (ie. comp as we will need to do a market assessment on compensation and provide welcome letters to employees, this is also used to adjust payroll costs in the model).


    Korath Wright

    Smaller deals generally require more Due Diligence in a relative sense, but it varies according to the desired risk profile of stakeholders. Certain DD areas require different levels of inquiry to account for features inherent to small companies.

    Small companies typically lack transparency and have fewer governance requirements. Their financials are less reliable and consistent, leading to additional work in getting numbers of a similar quality. Key people are more highly concentrated, and may include disembarking owners. More risks emerge from lower historical scrutiny in areas including previous tax positions, environmental regulations, health and safety requirements, and other regulated activities specific to the situation.

    A middle-market company’s Due Diligence timeline may be shorter than a smaller company’s, although likely with more total work-hours. Some of the activities required in Due Diligence take time to varying degrees regardless of how big the team is. For example, getting environmental test results back from a lab. Other processes require additional activities for small companies, such as rationalizing unreliable financial statements, or digging into tax history, etc.

    Additionally, legal remedies may not be applicable in the same way due to prohibitive relative fees and distraction, or if the selling owner/management stay on as managers to support performance through the transition.

    These and a multitude of other factors specific to the situation can lead to longer timelines and greater relative workloads for small business Due Diligence in order to deliver a comparable set of risks.


    Paul Reed

    Due Diligence (DD) will vary not only by deal size but by industry as well.

    As an intermediary, I work with businesses with enterprise values from approximately $3M – 10M in the mental health industry, and I build out a 12 week DD schedule in which we typically engage in the following areas:

    1. Corporate structures
    2. Capitalization & shareholders
    3. Financials
    4. Tax matters
    5. Employee benefits & labor matters
    6. Company agreements
    7. Licenses & permits
    8. Insurance
    9. Legal & regulatory
    10. IP matters
    11. Property
    12. Environmental matters
    13. Miscellaneous matters

    On average we spend approximately 10 weeks in review and close the transaction within 12 weeks.


    Sonia Shah

    I work in the Engineering and Construction Industry and we focus on the following during DD:

    1. Operations (inclusive of corp structures)
    2. Accounting and Financials
    3. HR
    4. Legal, Insurance, Contracts
    5. Health, Safety, Environment and Quality
    6. I.T and Systems
    7. Marketing
    8. Misc


    Kay Yong

    I think it largely depends on the target company’s business, which affects the key areas that you would want to focus on for the purposes of due diligence. Nonetheless, my view is that there should always be basic DD conducted on:

    1. Litigation/insolvency
    2. Financials
    3. Key contracts with suppliers/customers, etc..
    4. Licenses/permits
    5. Key employees


    Carolina Batista

    – Finance
    – Operations
    – HR Synergy
    – Litigation
    – Hidden legacies


    Jason Kiang

    Some key areas of focus:

    Key revenue drivers and projections
    Historical customer details
    Product/Service line pricing structures
    Salesforce details including performance, tenure and turnover
    Accounting, insurance, legal and tax due diligence, as already mentioned above

    I have an SOP which goes into more detail if that is of interest.


    Luka Mladinov

    I work as IT M&A consultant focused on IT due diligence. IT is often very complex to understand due to its technical complexity, number of systems, applications, end-users, etc. For these reasons, many deals fail to achieve planned synergies (after integration between 2 companies, systems might not talk to each-other, data might not be correctly integrated, access rights to apps might now work after Day 1, you might end up with having duplicate ERPs, HR, supply chain systems, having data scattered across different databases, etc.). In order to avoid this it is important to have strong IT due diligence before the deal.

    Here are only few activities that IT due diligence looks at.
    – Define IT applications and systems owners for relevant business functions (Finance, HR, Sales and marketing, Operations, Logistics, Customer service, Quality and regulatory, Legal, Procurement, etc.)
    – Create inventory of IT applications and systems
    – Document hardware inventory
    – Document infrastructure landscape
    – IT security (audit tools, authentication, directory services, encryption, virus protection, etc.)
    – Systems management (configuration / asset / change management, service/help desk, etc.)
    – Telecommunications (firewall, wireless, voice, data, etc.)
    – Identify business critical applications and infrastructure components


    Rochelle Ramos

    Key areas of focus would be:

    Financial: Review revenue, margin trends, balance sheet, stock price history
    Legal: Ownership structure, legal risk, intellectual property, leases
    Human Resources: Headcount, employee turnover, employment agreements, benefits, pay structures, culture assessment
    Operations: Product development, innovation
    Technology Infrastructure: cybersecurity, voice, data, systems


    Esther Persing

    Accounting, Tax, Legal, HR, Operations.

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