How to Complete Due Diligence: Information and Impact Analysis
In our previous article in this series, we covered the third step in the seven-step expansion through acquisition process. With the building a business case and developing financial modeling stages completed, your firm will have searched diligently for a target firm that meets all your needs from the perspectives of market sector, geographic location, service offerings, and cultural fit. You’ll also have issued and signed a well-thought-out Letter of Intent (LOI). Now, it’s time to begin the next step: due diligence. If you need a refresher on all seven steps, you can review them below:
- Define your acquisition strategy
- Identify target companies
- Build a business case and develop financial modeling
- Due Diligence
- Deal Structure negotiation
- Sign and close
- Post-close integration
With the effort used to get to the due diligence stage, it’s time for the hard work to begin! A recent study by the Harvard Business Review determined between 70-90% of all merger and acquisition transactions fail before they get to the closing table. One of the biggest reasons for this high failure rate is because of insufficient due diligence. If you want to make your acquisition succeed, it’s important to understand what due diligence is and how to thoroughly complete it.
What Is Due Diligence?
Due diligence is the part of the business acquisition process where the acquiring firm can analyze all the qualitative data that makes up a target firm, and assess the non-qualitative information that could make a transaction easily succeed or fail upon closing.
Top Questions to Ask Before Beginning the Due Diligence Process
Due diligence is a time-consuming process. As you consider leading a due diligence effort, it is important to ask and answer the following questions before you begin the due diligence process:
- Do we have all of the expertise required? If so, do they have the capacity needed to complete due diligence thoroughly?
- Who is responsible for the overall process?
- Who will oversee each component within this stage?
- What areas of due diligence are of key concern for leadership and why?
- What type of due diligence deliverables do we need to produce to present to the Board of Directors or others?
- What are the timing expectations from start to finish?
- How will you handle non-responsiveness or lack of data?
As you look over the above questions, one key question is missing – where and how do I start?
How Professional Services Can Help Your Company Through Due Diligence
Thinc Strategy has worked with various professional service firms across the United States to perform due diligence services on their behalf. Through these various engagements, we have developed a preliminary template of a typical due diligence engagement. Does this mean all engagements should cover each of these topics? Not necessarily.
Due diligence needs to be customized to meet the acquirer’s needs and review key areas of interest to leadership. This need for customization could mean due diligence begins with the standard structure, with some items removed as they are deemed insignificant to the acquirer. It could also mean that some items are added as they are deemed significant or critical to the transaction. Consider the below graphic for the standard due diligence structure a strategic starting point that can be molded where necessary:
Choose Thinc Strategy for Merger and Acquisition Advisory Services
As an industry leader in providing merger and acquisition advisory services, Thinc Strategy can help you through every step of the expansion through acquisition process. Our strategic business planning consultants will ensure your acquisition goals are met and the entire acquisition process runs smoothly. With our experts in your corner, you’ll know you’ve completely covered everything you need to know in the due diligence stage and are ready to move on to the deal structure negotiation phase.
If you’re interested in receiving a complimentary merger and acquisition advisory service consultation, please contact us. For more information on the seven steps of the merger and acquisition process, stay tuned for our next article, where we’ll delve deeper into each key area of due diligence to review what are typically key areas of concern and concentration.