Due diligence process requires a lot of time since there will be so many things to be investigated. Due diligence itself will be conducted by the buyer to a seller. The goal is to make sure that the decision to buy is not the wrong decision. The process of due diligence requires some serious investigations.
Buyers are going to investigate various sectors of the seller. Those sectors include the sales and customers owned by the seller, the future performance of the seller and whether it fits the strategic buyer, and some other sectors.
Due Diligence in Sales and Customers Aspect
Buyers want to know and understand the customer base of the seller, including the concentration level of the biggest customers and also the sales pipeline. Some topics that will be concerned about this aspect include what concentration risks or issues in the customer sector are there?
Some other topics will be how satisfied are the entire customers with the relationship they have with the seller? Will there be issues in keeping those customers after any acquisition? Is there any obligation or warranty issue with former or current customers?
Besides, buyers will also investigate the sales policies and terms and if there is unusual level of refunds, exchanges, or returns.
Due Diligence Process That Fits Strategic Buyer
Strategic buyers are concerned with the seller’s future performance as a stand-alone company. But strategic buyers will also need to know if the seller can fit strategically within the larger organization of the buyer.
Some investigations that are about to be conducted by the buyers will include some areas, such as: do the seller provide technology, services, or products that buyers don’t have? Will the seller over key people? Is there going to be a strategic fit between buyer and seller?
Buyers will also investigate the cost savings as well as the other synergies that can be obtained after the acquisition.
Due Diligence in Seller’s Material Contracts
One component in due diligence investigation that is critical and most time-consuming is reviewing the material contracts of the seller and the seller’s commitments. The contracts’ categories that are important to understand and review include the credit agreements, loans, and guaranties.
The other categories that are also essential to review include the supplier contracts, reseller, and customers; agreements of joint venture or partnership and the limited liability operating or company agreements; as well as contracts that involve payment over the material dollar threshold.
Settlement agreements, equipment leases, past acquisition agreements, employment agreements, exclusivity agreements, and indemnification agreements will also be reviewed by the potential buyers.
Due Diligence Process in Management and Employee Issues
Buyers will also need to review the management biographical information and organization chart, summary of labor disputes, consulting and employment agreements, loan agreements, documents that are related to the other transactions with the key employees, directors, officers, and related parties.
All investigations in due diligence should be conducted really carefully so that the buyers won’t make the wrong decision. The entire process above requires a lot of time but it is worth it.
