Why bother with Due Diligence on Asset Deals? - M&A 101 Series

If you are buying a business, due diligence is arguably the most important step you can take to protect yourself. It is the process of gathering and analyzing information about the target business before you commit and skipping it, or doing it poorly, can cause endless problems. Due diligence typically begins once the preliminary documents, such as a confidentiality agreement and term sheet are already in place. The purchaser submits a due diligence request list, which is a detailed list of questions and document requests organised by topic, covering areas like the nature and condition of assets, title to assets, transfer issues, and regulatory consents. That initial request list is almost always supplemented by further requests as negotiations progress and the purchaser learns more about the business. The key is to identify the critical assets early. Depending on the nature of the business, the deal may hinge on one or more key assets, such as real property, employees, intellectual property, customer relationships/contracts being assignable, or licenses from a regulatory authority. The purchaser should focus on these assets at the outset and confirm that legal title can be effectively transferred and that the customer or supplier will continue to transact with the purchaser post-closing. Due diligence is important because the findings directly shape the deal terms. Always better to uncover serious problems before closing and negotiate a reduction in purchase price or, in extreme cases, walk away, compared to finding out after the fact. The findings also inform the representations, warranties, and indemnities the purchaser will seek from the vendor. If the vendor is part of a larger group, particular attention should be paid to shared assets and resources, for example, intellectual property and employees, that may or may not be included in the sale. Due diligence often involves added costs on the advisory and legal sides, but these costs are well worth the investment, as it reduces risk and increases your chances of success post-acquisition. The more thorough you are as a purchaser, the fewer surprises you will face after closing.