M&A Due Diligence: Finding the Deal Breakers Before They Find You

DATE PUBLISHED: April 18, 2023

key takeaways

Due diligence is essential for both buyers and sellers in commercial transactions to assess risks and values.
Buyers should consider ownership, liability, price justification, business operations, and third-party consents during due diligence.
Identifying deal breakers early allows parties to restructure, adjust prices, or negotiate terms to mitigate risks and potentially save the deal.

Due diligence is an essential process in any commercial arrangement, sale or purchase of a business or company.

Whilst due diligence investigations have traditionally been undertaken by buyers to analyse the risk of a transaction, it is not the sole domain of the buyers. Other parties may wish to undertake due diligence (for example a seller may conduct vendor due diligence, as part of a competitive tender process, or a seller may need to do due diligence on the buyer if scrip consideration or deferred consideration is involved etc).

Effectively Engaging with Due Diligence

Due diligence investigations are a risk management tool utilised by buyers and sellers alike. Buyers are able to protect themselves against future pitfalls (such as unpaid debt or impending tax liabilities) and sellers are afforded an opportunity to proactively undertake housekeeping prior to a large transaction (such as a business or share sale).

Due Diligence

Due diligence is a systematic way to analyze and mitigate risk from a business or investment decision. It involves examining a company's numbers, comparing the numbers over time, and benchmarking them against competitors. - Investopedia

From the buyer’s perspective, a level of certainty is needed to determine what is being purchased and whether the purchase price is justified. While due diligence will not magically alleviate all the buyer’s concerns, effectively engaging with this process will not only inform the buyer whether the target business/company should be acquired, but also provide a crucial opportunity for the buyer to walk away from a potentially terrible deal.

Where To Start And What To Consider in Due Diligence

Whilst further information on specific issues may be required for each unique transaction, buyers should be mindful of:

1
The seller owns what they are purporting to sell;
2
Any potential liability and risk regarding compliance with regulatory, tax, employment, workplace health and safety and superannuation and other obligations;
3
Whether the purchase price being asked for is supported by the value of what is being purchased;
4
How the business or company operates; and
5
Any third parties, suppliers or governmental bodies which may require consents or approvals to transfer material contracts, licences etc.

The above is not exhaustive, and there are circumstances where a due diligence investigation will require an element of bespoke enquiry.

I’ve Detected a Deal Breaker, How Do We Move Forward?

Early identification of a deal breakers means it may not necessarily need to kill a deal. Depending on its nature, parties may diffuse/ contain it by:

NEGOTIATION

Negotiating a restructure of the transaction; for example, where there has been significant non-compliance from a company, changing the structure of the deal to an asset sale agreement where corporate liabilities will not be transferred may resolve the risk;

RESOLUTION

Requesting the seller resolve the issue before entering into a contract, or, inserting as a condition to completion that the seller remedy the issue to the buyer’s satisfaction;

PURCHASE PRICE

Adjusting the purchase price to reflect the cost of the potential risk or future liability exposure;

retention amount

Negotiating a retention amount to be withheld from the purchase price, to be released only upon certain deliverables being produced by the seller or the risk being so remote as to no longer be a concern; or

Dispute resolution

Obtaining specific warranties and indemnities from the seller within the contract and ensuring that any claims made against these provisions appropriate account for monetary remedies.

conclusion

Effective due diligence is a crucial risk management tool for both buyers and sellers in commercial transactions.

By engaging proactively, parties can identify deal breakers early and adopt strategies to mitigate risks or adjust the terms of the deal. Leveraging professional assistance can help navigate the complexities of the process, ensuring a smoother and more informed transaction, ultimately leading to better outcomes for all parties involved.

GET IN TOUCH WITH US!

We can assist with a range of due diligence services relating to regulated and unregulated M&A deals, restructures and large scale contractual matters (leasing portfolios, debt and capital market matter), including but not limited to:

Advising on the due diligence process from the seller or buyer perspective – is seller or vendor due diligence recommended – is buyer due diligence to be recommended – when do you allow buyers access to undertaken due diligence – do you withhold commercially sensitive data from buyers until a later stage in the process;
What type of due diligence is to be conducted, be it full scale and risk transferred to the buyer to understand everything or a confirmatory process (yes or no responses by the seller);
Our free of charge virtual data room service or working with you to use external data room services;
Advising on legal aspects of a corporate, commercial or contracting arrangement;
Advising on and assisting you with effective due diligence investigations, including reviewing documentation and preparing due diligence reports;
Negotiating and drafting contract amendments to mitigate risks identified in a due diligence; and
Proactively working with you before issuing a due diligence report to identify, investigate, assess and address potential ‘red flags’ which may affect the transaction.

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