How much is “too much”?
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In conducting due diligence, there are many facets to consider (e.g. financial, commercial, HR) to ensure reliability and fair assessment of a company.
In doing so, how should we balance between cost and effectiveness? (i.e. we can look through every single employee compensation contract, or only a sample)
I believe that buyers should be prepared to pay a premium if they feel they need to acquire an un-soliciting target. Otherwise the greater vision of acquiring may be lost in dwindling negotiations
I have that problem at the moment. The target is small and the DD cost could be material compared to the purchase price. But the risk of not doing DD and inheriting liabilities in my industry is large. The acquisition is strategic and needs to be done… i’m struggling with the cost of advisors for such a small transaction
As some of the above members mentioned, it really depends on the value and complexity of the transaction. In straight forward “plain vanilla” deals, the DD that is conducted is usually a “red flags only” or “short form” DD whereby only the deal-breaking kind of issues will be investigated such as looking at material contracts, enforceability of IP, regulatory compliance, validity licences etc. With regard to cost, this is also sometimes negotiated into the term sheet where sometimes the DD costs are shared between the buyer and the seller, or in the case of a merger, the surviving entity. Generally M&A deals are usually collaborative rather than confrontational – it is in both parties’ interests to close the deal. The risks of something going wrong after closing the deal (i.e. a major issue with the target that was not disclosed in the DD report or discovered through DD) are usually managed through getting the target to offer representations, warranties and indemnities (some surviving post completion for a short period of time).
It depends on the industry and target’s business model. For example, if the target is chemical company, Environmental DD will be must. If the target is IT company and their product is the key asset, it may not be necessary to run full-blown HRDD.
As others mentioned, buyers need to evaluate the target’s business model and decide what are the priorities in assessing the deal.
I saw a graph which had scope and price. if you stay narrow it will be cheap (lower left) , if you go broad it will be expensive (upper right). how far out do you want to go, is basically the question, and that probably revolves on the size of the opportunity and the impact different issues could have on the Acquisition. I think Bayer would have loved to see more environmental DD done on Monsanto’s Round Up line now that there neck deep in the billion $$ court case…
It depends on the companies involved and the industry of the target company. These can differ in complexity and with higher complexity, there should be more scrutiny as some unforeseen factors may slip through and cause issues down the line.
For employee contracts, my thoughts are that a sample of contracts can be selected to size up the most common employment terms for the main pool of employees. A detailed scrutiny of key appointment holders may be necessary given that there may be larger financial implications in terms of profit-sharing or termination.
Specifically referring to the property industry, I notice at times, some companies are willing to pay a premium for certain asset class when it is in demand. Likewise, some companies pay a discount for companies dealing with hotel assets at the peak of a COVID-19 pandemic.
Size and complexity of the Target would be a key determinant. The buyer needs to assess the risk of unknown and facing costs and liabilities post takeover against the time and costs of undertaking a comprehensive DD. Materiality from a financial and reputational point of view can aid in taking the decision. Limited or red flag DD approach can be adopted provided the seller/(s) are willing to provide comprehensive representations, indemnities and warranties for an acceptable period of time. Further to mitigate the risk of default or not keeping up obligations under the Sale and Purchase Agreement, buyer may also insist on retention proceeds maintained in an escrow.
Great question. In one of the case studies, with smaller company acquisitions, they seemed to take great leaps with less information as it aligned with their vision for the company. I think the level of detail is relative to the size of the deal and urgency behind it. In general, I think a good rule of thumb is having as much data as possible. However, if you get too much data, you can get lost in it and the opportunity can pass you by, especially if too many decision makers are in play.
In Context of Tech-startups / Medium size / Between series A-B funding.
I find it really important to confirm that the “tech-solution” is actually working, scalable. validating registered patents if any.
Discovered various startups claiming they have “AI” / Predictive solutions… Only to discover that it’s pretty manual and not sustainable.It’s true, if there were no timelines we might never stop diligence! Typically we want to focus on financial and business/commercial diligence and really run that as far as we can go. To your point, on the employee front, a sampling would suffice, and if you saw anything weird you might then expand that sample. Diligence is both an art and a science.
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