The Forest and the Trees in Due Diligence

by Jan Hoffmeister, Managing Partner DRS,
published in shared yearbook 2009 of the Federal Association for Mergers & Acquisitions Association (BM&A) and FINANCE

A buyer should carry out four essential steps during a buy-side due diligence in order to successfully complete his or her examination.

Many due diligence project leaders are faced with the challenge of leading a team of specialists through the buy-side due diligence process. The team members, who are very committed to the task at hand, are often faced with their first buy-side due diligence. The sell-side team leaders generally are experienced in putting together a data room. However, every company that is up for acquisition is different and the kind of information to be examined is therefore completely different. Normally when buyers and sellers carry out an optimal due diligence it should end up in a win-win situation. For when a transaction is carried out in a transparent way, the seller can obtain the best possible price while reducing the liability risk. The purchaser, on the other hand, has a positive perception of the sale object and can focus on the main tasks that must be undertaken by the team.

The Four Steps to a Buy-Side Due Diligence

To carry out an optimal buy-side due diligence, the purchaser must be clear about why he or she is carrying out a due diligence in the first place. The purchaser should proceed in the following way:

• compile all the facts about the object for sale (in order to become familiar with it and to plan its integration)
• assess the assumptions made in the stand-alone business plan for opportunities and risks
• verify the assumptions made in the business plan taking into account the synergies (benefits for one's own company)
• identify deal breakers
  

Buy-side due diligence team members often have the tendency to become lost in the details of the area they specialize in. An assembly-line specialist can spend days reviewing a factory's production plans, for example, without getting a crucial overview of the entire assembly process. For this reason, a due diligence should always be carried out from the top down. This means the objectives listed above should be repeated to team members and the team leader should establish a system that prevents individual team members from sinking into a morass of details.