What are the Responsibilities of Buyers and Sellers During Due Diligence?

Due diligence is an essential part of the M&A process — for both parties to a deal. Buyers need to confirm that the target company is what it has purported to be: that its financials are sound, operations align with financials, employees are committed and it isn’t encumbered by legal liabilities. For their part, sellers must ensure buyers are satisfied with their findings.

Buyers Asking More Questions

These days, risk-averse buyers are assessing potential purchases with a sharper eye than they might have had prior to the 2008 recession. Some of the questions you’ll want to ask are:

• Is the company what it says it is? If your seller claims it’s a leader in its industry, that it has a substantial pipeline of new products or that its client base is growing, it must substantiate such claims. Be wary of excuses and vague answers to pointed questions — they may be a sign of disorganization or, worse, mismanagement.
• Are there any surprises? Your seller may have neglected to mention substantial debt obligations or potential legal issues. These don’t necessarily have to kill a deal, but you should consider them when setting your offer price and planning post-deal integration.
• Are stakeholders prepared for a new owner? In some cases, important customers or key employees object to the company’s sale and threaten to leave when they learn about it. If you find this kind of resistance, personally communicate your plans and consider providing these stakeholders with incentives to remain loyal.

Sellers Should Tidy Up

Prospective buyers are on the lookout for anything that might make their deals unprofitable. So sellers need to root out problems, clean up their balance sheets and anticipate buyer questions before due diligence begins.

One of the most important tasks is to ensure that financial statements are current. Future projections, particularly of earnings and profits, should be based on the most recent figures, which may be quarterly or even monthly. Also have several years of financial statements, and relevant legal and operational documents, ready for your prospective buyer’s review. If you haven’t already, get inventory reporting and other records in order so that you present a transparent, well-run organization.

Getting it Right

Due diligence can be a challenging process. But if you play your role properly, you can avoid deal-spoiling mistakes. Preparation is critical for sellers, while buyers need to focus on asking the right questions and reviewing all documents thoroughly.

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