Almost every day I read a new article predicting that robots will replace most of us lawyers within 15 years or so. It is an interesting thought! Today’s science fiction is tomorrow’s science.
For the time being, though, we’ll have to do legal due diligence (LDD) reviews the old fashioned way. If you don’t have any robots around, make sure that the following six quality drivers are in place in your DD process to make sure you get value for the money and time you invest in it.
1. Does the quality of the data room meet your expectations?
Entering a virtual data room in which the material is not properly organised is a little bit like entering a house that hasn’t been cleaned for some time. It doesn’t give a good impression of the target company or the seller.
It’s essential that the reviewers can easily and quickly understand why the documentation disclosed is relevant. It’s always useful for a buyer candidate to ask for the request list used when compiling the materials. This will give you a better understanding of the completeness and relevance of the disclosed information.
The request list isn’t sufficient alone, though. In addition, you may need answers to the following questions:
- To what extent were some requests not relevant for the target company?
- How were the disclosed commercial agreements chosen?
- Why is some relevant information missing?
Providing this information up front would speed up the Q&A process a great deal, and we advisors wouldn’t have to repeat the same questions just to understand what we are reading in the data room.
2. Do you understand the limitations of the written word?
A picture is worth a thousand words. This is also true for LDD material, which typically contains only written documents and agreements.
Take, for instance, the key customer agreements. They don’t reveal anything about the correspondence between the parties after the agreements were made. Have both parties complied with the agreement? Are they satisfied with the performance of the other party? Were payments made on time? Have there been claims? Are the agreements still in force?
All of these require follow-up questions in order to get a sufficient picture of the target’s contractual relationships with its customers and the potential opportunities or risks related to them. This is where the real added value of an LDD review lies, and you should put the emphasis on a smart Q&A process.
3. Are the right persons answering the questions?
Given the importance of the Q&A process, it is essential that the persons selected to answer the questions are the right ones. Since there are many reasons for the seller to keep the transaction team small–like keeping the pending sale process confidential–having the relevant experts on board is a significant quality factor for the DD process.
Sometimes when reading a Q&A sheet, you don’t even know who’s answering the questions. This doesn’t add to the buyer’s comfort with the results of the LDD review, and it’s rarely in the seller’s interest to not be open about this.
A lack of comfort on the buyer’s side will undoubtedly affect the upcoming negotiations. Considering that buyers in a Finnish deal are often ready, or at least expected, to accept that the seller isn’t to be held liable for risks adequately disclosed in the due diligence review, there should be a clear interest for the seller to invite the relevant experts to contribute to the Q&A.
4. Is there access to the management?
As a buyer, you should always make sure that your DD teams get proper access to the management of the target company. Sometimes this is even more crucial than having access to the data room materials.
To only interview the seller’s representatives may not be enough if they don’t have hands-on knowledge of the business. An interview with the target’s management is often more efficient compared to a lengthy Q&A process in which new follow-up questions arise from the answers already given.
And since it’s not rare that the target’s management tends to get frustrated with endless questions from the arsenal of advisors representing many potential buyers, an interview face to face may be a quicker and easier route to get the missing bits and pieces in place. This kind of meeting usually also adds to the buyer’s comfort.
5. Are your advisors collaborating enough?
In the good old days when financial, legal and other advisors gathered in a physical data room and spent several long days sitting together sharing information, coffee and biscuits, no particular effort was needed to collaborate. Today the reviewers can be located anywhere in the world and work together virtually. This is a clear benefit in many ways, but comes with a risk of less collaboration.
It’s in your interest to clearly divide the work between your advisors to avoid over-laps, but it’s also important to require that your advisors regularly exchange views and compare findings to avoid information gaps.
Sometimes information disclosed in the financial documents is also relevant for the legal review and vice versa. It isn’t rare that financial advisors are able to shed some light on the commercial implications of certain findings in the LDD review, or that lawyers may spot an opportunity or risk linked to a commercial issue. Often, a price tag can then be given to the risk identified. None of this requires much time, but definitely adds value and increases the quality and usability of the DD reports.
6. Are the timetables realistic?
While it’s true that generous timetables seldom optimise efficiency, overly tight schedules come with a risk that you won’t get the most value from the review.
In most advisory firms, processes for reviewing documents and writing reports are trimmed to meet even the most challenging deadlines. However, the entire DD review can’t be carried out mechanically–even by robots. Analysis and reflection by an experienced professional is still essential and takes time. Considering that this is the part of the review that typically adds most value to the report, it really does not make sense to rush at this point.