July 6, 2020 HMA Website

M&A Lifecycle Phase 2, Due Diligence

Before leaving on a journey its’ always useful to have a map to navigate your way from where you are to where you want to go. Hart Marx Advisors has identified five phases of the lifecycle of a merger, acquisition, or divestiture. We believe this will help you embark on this journey with greater confidence.

The measure of a successful transaction is determined by the amount and quality of planning that is executed for each of these M&A lifecycle phases: Pre-Deal Preparation and Evaluation of Transactional Assumptions, Due Diligence, Pre-Close Planning, Post-Close Planning, and Post-Close Execution.

It is not enough to just complete the deal according to financial goals. Making smart financial moves in and by itself, can still spell disaster after a deal is closed. A well-designed M&A strategy will identify why a deal is a profitable undertaking and help position it to be positive for all involved. Professional guidance and expertise early in this complex transaction, may be the smartest move your company can make.

Phase 2, Due Diligence

Closely related to Pre-Deal Preparation and Evaluation of Transactional Assumptions is the Due Diligence phase. Due diligence is one of the most overlooked and often poorly executed aspects of M&A deals. Though a transaction may be a financial and/or strategic fit on paper, far too often the transaction fails in some respect to garner the desired end result due to lack of a thorough process that may challenge the deals basic underpinnings.

Due diligence involves investigation into the strategic and tactical fit, financial, legal, environmental, regulatory, and cultural elements of a company, and involves obtaining detailed information not usually contained within the public domain. Due diligence is meant to validate assumptions, unearth possible problems, and begin to plan for transition.

When a buyer or seller thinks about the sensitivity of the information they will be required to disclose during Due Diligence, data security and storage, confidentiality and access control, proper disclosure and relative ease and accuracy of data dissemination becomes imperative. The use of a cyber-secure and carefully managed dataroom is highly recommended and frankly, should be demanded by both sides to a transaction.

Portions of the due diligence process will be performed by various individuals with appropriate levels of intensity and scrutiny, depending on the complexity of the deal and the where you are in the deal lifecycle. Most of us are aware that we need lawyers to do the legal due diligence and accountants to do the financial aspects, however failure to engage an entity such as an M&A Advisor to oversee the whole process more often than not leads to sub-optimum results.

A costly mistake can be made by business owners, be they acquirers or divestitures, who believe that their knowledge of the industry is sufficient to provide for a good outcome, or underestimating the time commitment required to provide the level of detail required by the process. It is also critical to view your M&A Advisor as your advocate in the process. An experienced Advisor can anticipate and mitigate many issues that arise during Due Diligence.

We advise our clients to think carefully about the importance of planning ahead in order to achieve a favorable outcome. In essence, establishing a detailed plan for the due diligence phase and by assembling an experienced and competent team to guide the process, you can greatly increase the probability of completing a successful transaction.

Look for the next in our Blog Post series titled M&A Lifecycle Phase 3, Pre-Close Planning