What is due diligence?
Due diligence is a vital part of the acquisition process. Before proceeding with an acquisition, an acquirer will want to have a clear understanding as to what it is that they are buying, what obligations they are assuming and what risks exist.
The due diligence process is generally complex, time consuming and expensive for all parties involved. For this reason, it is vital for everyone to ensure that due diligence is completed at the right time.
When is the Right Time to Complete Due Diligence?
The short answer is: it depends.
Generally, the most efficient approach to completing a transaction for all parties is for acquirers to undertake an initial review of the opportunity. This is most commonly done through reviewing an Information Memorandum or Prospectus document. These documents commonly outline all basic details about the opportunity, including financial performance, industry insights, employee arrangements, and some detail on the profile of customers and suppliers.
Based on their assessment of the Information Memorandum or Prospectus, quite often an interested acquirer may be able to place an initial, non-binding proposal outlining their opinion of the business’ value (often in the form of a rough range), and their wishes for key contract terms should a transaction proceed. As an acquirer, placing forward an initial proposal at such an early stage in the process can be advantageous for a couple of reasons, namely:
1. You can quickly understand whether your proposal is palatable for the selling party, and;
2. You put yourself in a good position to beat other potential acquirers to the negotiating table (and hence dilute competitive tension).
From here, the seller and acquirer can sit down at the negotiating table and discuss whether, in principle, the acquirer’s proposal is worthy of working with.
Should the seller and acquirer have a proposal that is worthwhile proceeding with, it is normally then that the due diligence process should begin.
As part of this process, the sellers will normally release additional information in a controlled fashion to enable the acquirer to refine their offer, and to enable ongoing negotiation of contract terms.
When is the Wrong Time to Complete Due Diligence
For the purposes of efficiency and confidentiality, it is important that Due Diligence is not undertaken until there is a reasonable chance that the seller and prospective acquirer will proceed towards completing the transaction.
On this basis, it is never recommended that due diligence occurs too early in the course of a transaction. Too often, sellers and acquirers will delve into significant detail and undertake a rigorous analysis of business financial statements and other operational records too early in the process. This is normally expensive, time consuming and generally does not assist the acquirer in making an informed decision, or the seller in executing a transaction.
Find Out More
Quinn M&A’s experienced transactional advisors can provide comprehensive due diligence advice for both business buyers and sellers. Contact Quinn M&A on +612 9223 9166 or submit an Express Enquiry to arrange a no cost consultation with one of our Directors.