Diligence is required to provide the buyer with a validation of purchase price and a clear indication of deal risks – a balancing act between cost and perceived risk. Diligence should be tailored to the deal and vary depending on what is being purchased and the complexity of the transaction. Buyers conduct financial and legal due diligence, evaluate the financial potential of the merger or acquisition and proceed with closing and integration. But for some buyers, love is blind and little attention is paid to proper due diligence. Here are a few common mistakes that may lead to increased closing and post-closing costs.
Mistake #1 – Focusing only on financial due diligence
Due diligence does not stop at the financial side. The buyer may become too focused with financials to the detriment of other areas. A systematic assessment of all aspects of the business is required to ensure value for money. Areas of focus include legal, tax, management, intellectual property, employment and labour and insurance. These areas may expose the buyer to liabilities which question, or change the state of, the financials and general accounting policies.
Mistake #2 – Closing a transaction, without transactional lawyers on both sides
M&A deals can be complex, and require manpower and dedication upfront. If the seller’s counsel is not a transactional lawyer, the purchaser’s requests may be perceived as unreasonable and daunting. There may be loss of deal flow and lack of efficiency on both sides. A party’s due diligence thus starts with finding appropriate counsel. Transactional lawyers are proficient in reading the due diligence and providing the necessary protections in a purchase agreement.
Mistake #3 – Getting too invested
A buyer’s investment into the deal is positively correlated with its commitment. As more time and money is invested, it becomes harder for the buyer to walk away, potentially leaving the door open for sellers to extract concessions during negotiations. Consequently, due diligence should be conducted as a matter of priority early on in a transaction with red flags being raised promptly before the buyer develops a heightened tolerance for risk (and a heftier price tag).
The closing and post-closing costs of certain due diligence mistakes can range from being minor to detrimental for either party. Companies such as Quaker, BMW, Time Warner and Mattel have suffered losses due to rushing a deal at the expense of proper due diligence. Don’t add your client to the list.