One of the most underestimated and time consuming parts of any acquisition is the due diligence process. Due diligence is a buyer’s investigation of a seller’s business that occurs prior to the closing of the purchase. It is designed as a formal process for a buyer to discover and a seller to disclose all issues that could place the buyer’s investment at risk; including financial, commercial, environmental, legal, and clinical concerns. The process typically occurs after confidentiality agreements have been signed. While a buyer may and should want to complete a brief preliminary due diligence period before making a formal offer in the form of a letter of intent (LOI), the majority of the extensive due diligence will come after the LOI’s signing.
Due diligence is primarily designed to protect the buyer, facilitate planning for post-transaction, and help the buyer better understand market opportunities. Even though many of the benefits from are geared towards the buyer, the process itself should never be solely controlled by the buyer.
If managed properly, due diligence can result in many benefits to the seller including but not lim- ited to:
- The minimized risk for a broken deal
- Favorable sell side reps and warranties
- Less conflict between buyer and seller
- A better negotiating position during the discussions of the definitive purchase agreement
- A quick close
Unfortunately for some sellers, the lack of organization, staffing, and documentation often make due diligence more stressful than successful. It is pertinent that a seller understands the preparation, time required, and multiple steps that are necessary in order to reduce stress, negotiate favorable representations and warranties, and come to a quick and successful close.