Due diligence is an investigation of a business or even a person prior to signing a contract or an act with a certain standard of care. It can be therefore a legal obligation but the term will more commonly apply to voluntary investigations. However, a common example of due diligence in various industries is the process through which a potential acquirer evaluates a target company or its assets for an acquisition.
The theory behind global due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and even the quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs, benefits and risks. Due diligence investigations takes different forms depending on its purpose;
- The examination of a potential target for merger, acquisition, privatization, similar corporate finance transaction by a buyer.
- A reasonable investigation focusing on material future matters.
- An examination being achieved by asking certain key questions.
- An investigation of current practices of process and policies.
- An examination aiming to make an acquisition decision via the principles of valuation and shareholder value analysis.
It is essential that the concepts of valuations (which is shareholder value analysis) be linked into a due diligence process. This is in order to reduce the number of failed mergers and acquisitions.
The following are some of the factors to consider when selecting a due diligence firm;
Size of the transaction
The Client should select a provider that specializes in the transaction size that is similar to the deal under scrutiny. For instance, a large bank working on a small deal assigns its most junior people to the transaction yet charges big time fees. Where, in the middle market, the client is better off with a provider that focuses on that segment. Such a provider knows the transactional nuances in that segment and the unique due diligence aspects for such businesses.
The provider does not have to be an in depth expert to render a fairness opinion but it helps the process if the provider has had some exposure to the firm in which the client operates. Firm frequently have specialized valuation ratios with important data points and certain documentation attributes. The provider can pick these up with some research but the process moves smoothly if the provider has worked on a number of firms transactions in the past.
Broad deal knowledge
Most fairness opinions revolve around corporate M&A, assets sales or even divestiture while many involve more esoteric transactions such as recapitalizations, highly dilutive equity financings and buy and sell agreements. Besides M&A experience, consider an advisor staffed with senior professionals that have seen a large variety of situations.
Where there is no conflicts
This is where in the past, public companies typically received fairness opinions on M&A deals from the investment banks that gave them advice on the transaction, since the bulk of the advisory fee was success-based, and the conflicts inherent in the bank rendering a fairness opinion were obvious. Lawyers and regulators should now encourage prospective users of fairness opinions to retain a provider who is conflict free with no perceived bias on whether the transaction at hand closes or not. Visit this site for more information : https://www.kreller.com/