How does the cost and length of Due Diligence change across market segments?

This topic contains 3 replies, has 4 voices, and was last updated by  Nick Picone 1 month, 1 week ago.

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  • #107874

    Korath Wright
    Participant

    How are absolute cost, relative cost, and timelines of Due Diligence projects impacted by size in (1) a small company merger, (2) a middle-market merger, and (3) a mega-merger?

    In my opinion, each Due Diligence project is different, and has to take into account the unique requirements and goals (including synergy goals) of the project. However, there are still certain traits that apply to mergers of different sizes.

    The small company would have the greatest relative costs and a timeline comparable to or even longer than that of a middle-market company. It would also have the lowest absolute cost on account of its size. Ultimately lower levels of governance, controls and transparency mean more work is needed to get real numbers out of a small business. As well Due Diligence maybe required to be more extensive in various areas because of higher risks, and result in increased change management costs. For example, greater concentration of key employees (fewer people responsible for creating value) causes reduced power in individual contract negotiations and a greater impact from attrition. To balance the risk, a greater investment can be made in the form of retention packages, monitoring/feedback systems, HR sourcing backup people, etc. Additionally, legal remedies are less available to small businesses because of relative legal costs, reducing the protections that maybe present in the SPA. This increased risk can also require more due diligence expense.

    The middle-market merger Due Diligence would have typically the shortest timeline, with more trustworthy documents and application of standardized processes, such as regular audits.

    The mega merger would have even more available and pre-scrutinized data, and a higher potential for public data. However it would have such a greater scale that the timeline could be significantly longer, depending on the scope of the project and stakeholders involved. The relative cost would be the lowest, in general, and the absolute costs would be the highest.

    #112888

    Jason Kiang
    Participant

    DD in small deals can be done with very limited time and cost.

    In fact, I have heard of small deals that have been closed with no formal DD at all.

    Risk can be mitigated in a number of ways, such as the use of earnouts and key man insurance.

    #112948

    Petros Lampropoulos
    Participant

    I agree that DD in small deals can be of very low cost and can be in the form of a feedback from an advisor on the reviewed documents (which requires less time and does not go through a full depth analysis. But again it depends on the market segment and on the size of the target. A small company can be covered from a small DD considering that there are not many HR issues, they most probably uses straight accounting methods and the review is more straightforward. I agree with the mega merger approach.

    #113277

    Nick Picone
    Participant

    Small company acquisitions can be difficult as many times you are dealing with the founder of the company who has put their life into it and has a hard time letting go or thinks it is worth more than it is. Usually there are family ties as either investors or employees of the company. Most of the time, the small companies do not have sophisticated financial or MRP systems and it is difficult to understand their cost and profitability of the company.

    Middle market and mega companies follow a more standardized process with a data room and proper documentation to enable a solid DD process.

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