Mergers and Acquisitions Due Diligence Explained - YouTube

Hi there it's Brett Cenkus the right-brain business attorney and today

we're talking about due diligence so this is a topic that comes up in all

sorts of different contexts in the law lenders perform due diligence before

they give loans there's other contexts which venture capital investors will do

due diligence on a company but I'm talking about it today in the mergers

and acquisitions context so if you're selling your business this is a concept

that you're going to have to warm up to and I'm looking right now at a due

diligence checklist so this is something that a buyer once they've signed a letter

of intent or once they've had some indication of interest they they feel

like a deal is happening they would send over to the seller of the business a

list of things that they'd like to see so this is organized by topics

it's got finance it has legal operational strategic human resources

basically the main functions of the business and then it's a request for

certain documents so due diligence is the process of kicking the tires and

being sure that what you're buying in this case is what you think you're

buying and so this is can be a pretty painful process for sellers because it's

mmm kind of like a root canal for the business I mean you're really forced to

gather lots of documents and produce them there's multiple rounds of

follow-on questions if it's a big business a large business and there's

big deal teams the questions can come from all sorts of different directions

it's common to organize all the due diligence items so your responses in to

folders you can do it Dropbox or Google Documents there are off-the-shelf

products out there intra links and ideals and things like that that are

that are built for this purpose but you're gonna get this as a seller and

it's gonna be a request give us an organizational chart give us financials

for the last three years profit and loss statements income statements cash flow

statements give us tax returns customer lists top ten customers each of

past three years and the total volume they've done give us all your contracts

I mean it's just about everything and it can be very very in-depth and the

process could take a few days can take a few weeks can take a few months for

larger deals back in the day before you know the internet was you know what it

is today you know back in the late 90s when I started practicing we would

actually do this in physical locations we call them deal rooms or war rooms

where people would get together and there'd be boxes and boxes of these

documents so count you so fortunate that you don't have to go through that today

but it's still a very involved process and as a seller can be pretty painful so

one way to deal with that is to just understand what's coming to get a copy

of a due diligence check request list and just map out what what the buyers

gonna be looking for and so part of this is being organized which will make it

easier to respond so if you could do this before you get deep into

negotiating the sale of the business that's that's helpful you know if you

know you're selling the business to start thinking about it this way and in

today's day and age of electronic files you probably some file structure system

already so but you're looking for all your contracts all your permits leases

you're looking for HR records it's a very very in-depth goes without saying

that you would only provide this information whether they're a competitor

or not under the cover of a non-disclosure agreement that would be

very very common in this context and so as a buyer there aren't many examples or

yeah I mean I guess there's quite a few add up over the years but it's not that

common to see a deal fall apart during due diligence it tends to be more of a

perfunctory sort of rubber-stamp that the buyers buying what they think

they're buying or they might find something that's problematic and causes

a renegotiation of the terms sometimes the deals do blow out you know - and

that happens more if we you know if I represent the song we haven't let the

buyer very under the hood maybe they just don't have a great idea of what the

finances and things really look like when you get in there but for the most

part you can expect it's probably going to be a relatively perfunctory let's

just make sure I'm getting what I think I'm getting it won't make it any simpler

for you to deal with from it just it can be pretty taxing on time but bear in

mind that there's a light ahead that this should you know most cases be a

rubber stamp and your deal should hold okay you want

to avoid major surprises if there's big issues talk about that up front with

your council and your advisors how are we going to deal with this when is the

proper time to show this you know how do we address these things and think that

through obviously you have to disclose every major issue when you're selling

your business any anything that could possibly be material but there is some

degree of discretion regarding when you do that and how you do that it's best if

that doesn't just pop up on someone's sort of randomly doing a little little

due diligence and number two a buyers looking to make sure you're organized so

some of that process and your advisors can help you through that is to show

that this business is well-kept it's it's it's it's tight it's organized the

contracts have every page and they're signed and you know stuff like that

so again it can be kind of painful from a time and labor standpoint but it

shouldn't blow your deal on the buyer side of things there's no limit to what

you can ask for so it's just kind of what makes sense to see again they come

over in this form usually five six seven pages lots and lots and lots of requests

but you're gonna have a short list as a buyer of things that are

particularly important and usually that's gonna look like financial that's

gonna look like the contracts with major customers you know things of that nature

so if you have questions about due diligence certainly reach out if you've

gotten the point where you're doing it congratulations you're close to the

finish line hang in there