SURVIVING M&A DUE DILIGENCE

You may remember the commercial when a camera catches a winning Super Bowl player who proclaims “I’m going to Disney World”. Well, Mr. or Ms. Business owner, you have just sold your business for a small fortune, what are you going to do next? I can assure you that a trip to Disney World will not be in your immediate future once you receive the financial, tax, legal and other due diligence (DD) checklists and questionnaires from the buyer’s professional advisors.

Preparing a business for sale and negotiating favorable sale price and terms with a buyer are just the beginning to a successful M&A transaction since they are based on various verbal and written representations made between seller and buyer during the negotiation. Perhaps more important than the negotiation phase is the due diligence phase when these and other representations, assumptions and expectations are put under the glaring lights and microscope of countless accountants, attorneys, actuaries, consultants and other probers of fact.

Aside from being the most crucial phase of a successful M&A transaction, due diligence can completely overwhelm a company’s accounting and administrative staff unaccustomed to responding to the hundreds of technical questions and requests for documents they will be inundated with in a relatively short period of time and often under severe time deadlines and constraints. Moreover, these same staff are still responsible for getting their normal day to day work done, such as month end closings, while responding to these requests.

Considering how much is at stake in responding to these DD requests in a thorough and timely manner I would like to discuss how I have developed a service offering specifically geared to financial and tax DD requests and how this service will add great value before, during and after the sale for both seller and buyer. I find this service is of particular value when the buyer is a publicly traded company as the DD requirements are much more extensive in those instances.

Ideally, I like to become involved as early in the process as possible; even before the formal financial DD request is received. Having been through the process numerous times I am able to anticipate many of the requests and help staff gain a head start on the process. I also find that this early involvement has a calming effect on staff and gives them assurance that we own the process and there will be few if any surprises.

Once the DD requests, and the inevitable follow up and supplemental requests, are received there must be in place a formal system for reviewing the DD responses and documents for relevance and appropriateness, organizing, labelling and filing same into electronic folders and, finally,  uploading all the above to a Virtual Data Room (VDR) that is typically opened specifically for DD.

The key to this process is my system for cataloguing and tracking the flow of responses and documents such that DD requests and follow up are being processed and responded to in a thorough and timely manner and that seller, seller’s staff and advisors always have real time access to the status of all DD requests, particularly those that remain open or could be potential “deal killers”.

In addition to the aforementioned benefits of my DD services, as a CPA who practiced for many years in public accounting I am conversant in the terminology used in the DD process and have an understanding of not only what is being requested but also why. This understanding is invaluable in translating the technical terminology used in DD requests into plain English that staff can easily be responsive to thereby making the process most efficient for all involved.

When the acquirer is a publicly traded entity there will usually be an audit of the seller’s books simultaneously with the DD process which can further stress, if not completely overwhelm, the seller’s accounting department. In those situations, my service offering is frequently expanded to include assisting staff with anticipating and responding to requests for client prepared and other documents and information in connection with the audit.

Finally, it should not be overlooked that one of the reasons a buyer will pay a premium to acquire a business is the value it places on staff in place after the transaction is closed. If staff is overwhelmed, ineffectual or lost due to DD overload that can have a suppressing effect on the transaction itself and/or sale price.

M&A activity, by some accounts, is at an all-time high. If you are or will be entering into a sale or merger event, or if you are a professional advisor to a client doing so, I believe your transaction will be enhanced by our CFOS2GO DD support.