Right amount of effort to put in a DD?
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Do you find it easy to gauge the right amount of time, money and effort to invest in a DD? The transaction size will sure play a role, but tax/legal liabilities or reputational risks need also to be mitigated depending on the business.
This is an issue I have on most deals I run. Usually, it is due to size and complexity, but I’ve also found it has much to do with the sophistication and foresight of the seller.
It is related to the different factors of the transactions and targets, such as in an asset deal, less DD on the historical tax liability and employee liabilities; if the target is a public listed company, there would be less concerns on the anti bribery DD; and smaller scale target, would need less time/ less effort on DD.
It is about balancing – identifying the most significant aspects that could have a material impact on the commercial terms of the transaction. There will definitely be other types of issues left untouched but these can always be incorporated as assumptions of the offer, caveats for the next stage of the transaction or as conditions precedent to closings.
Excellent question. Liwei Wang made a good point that it really depends on the sophistication and type of target. It might be helpful to do some narrow pre-LOI diligence work on the target if you had a good relationship with the target and can gain access to a limited set of information. This pre-work can help you in scoping, initial financial modeling, and assessment of resources needed.
I also think your familiarity with the industry and their business model will influence the amount of effort that goes into DD. If you have an intimate understanding of a particular business model, many sections of DD may be not as important and you will be aware that there are other aspects which will need extra attention.
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