don’t be rushed by deal fatigue.
by marc rosenberg
cpa firm mergers: your complete guide
few cpas enjoy the due diligence part of a merger. it’s like proofreading legal agreements or going back to our school days when we had to double-check our answers before turning in a test.
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by the time due diligence begins, the parties have usually reached a handshake agreement on the deal terms and decided they want to merge. due diligence is a process that confirms a decision that, for the most part, has already been made. it’s like checking references after you’ve interviewed someone and decided to make the hire.
as a result, this inspection and evaluation can be rushed, perfunctory or underperformed. due diligence frequently falls victim to deal fatigue, the point at which the firms just want the deal done. this can lead to becoming sloppy, ignoring important facts and making poor judgments. firms must be vigilant to avoid this attitude.
many post-closing disputes can be attributed to inadequate due diligence. an unhappy party to a transaction rarely (if ever) says, “i wish i had done less due diligence.”
the importance of undertaking the necessary level of due diligence cannot be overemphasized.
our approach is to give you a comprehensive list of due diligence issues and let you select which reviews you wish to perform. the ultimate decisions rest with you.
due diligence defined
“due diligence” is one of those terms that has a slightly different definition depending on whom you ask. here is how the website uslegal.com defines it: due diligence in a broad sense refers to the level of judgment, care, prudence, determination and activity that a person would reasonably be expected to perform under particular circumstances. in corporate law, due diligence is the process of conducting an intensive investigation of an organization as one of the first steps in a pending merger or acquisition. in a company acquisition, due diligence would include fully understanding all of the obligations of the company: debts, pending and potential lawsuits, leases, long-term customer agreements, employment contracts, compensation arrangements and so forth.
due diligence is a process of acquiring objective and reliable information, generally on a person or a company, prior to a specific event or decision. it is usually a systematic research effort, which is used to gather the critical facts and descriptive information that are most relevant to the making of an informed decision on a matter of importance.
thus, due diligence is a process undertaken by both buyer and seller to assure themselves that there are no material facts, circumstances or conditions with respect to the other party’s business that would make the proposed transaction unacceptable or require an adjustment to the terms.
the due diligence process is closely related to the warranties and representations made by the parties in the merger process. the difference is that due diligence is fact gathering by one party, whereas a representation or warranty is a fact statement made by a party on which the other party is entitled to rely.
due diligence typically involves the following steps:
- define the scope of due diligence and develop a list of information, mostly documents, to request. ask only for documents that are relevant, not simply a data dump containing insignificant information that tries the other firm’s patience.
- catalog incoming documents. if it’s feasible given the size of the transaction, make them available in an electronic format. follow up on missing or incomplete documents in a timely manner.
- review the documents provided. establish internal deadlines for completing the review. avoid the embarrassment of asking questions that are answered in the documents. follow up to obtain greater clarity on important points.
- regularly update the other firm on the status of due diligence and the anticipated date of its completion.
- as due diligence draws to a close, prepare a list of areas of concerns that need to be addressed in the transaction agreements or otherwise. this may be an ongoing process throughout due diligence, but there is usually a final (and hopefully short) list.