Getting the Deal Done: Four Tips to Speed Buyside Due Diligence
24 August 2016
“Time is enemy of the deal,” our advisor said to me as we started diligence on a potential acquisition. Having participated in deals that fell apart because of delays in diligence, this mantra has very personal significance. However, the volume of information, increased disclosure requirements, and complexity of multi-location, multi-country targets conspire to take even more time. This is especially true for buyers bidding against larger, more experienced deal teams. Lack of preparation can not only result in delays, but worse, risks missing material issues under deadline pressure.
To help speed your due diligence process, here are four tips we recommend.
Deal teams should prepare for diligence long before a deal is on the horizon. Build the team and define clear roles and responsibilities. Locate internal IP experts and sign standby contracts with external advisors where appropriate. Having this done in advance will save irreplaceable days when a deal opportunity surfaces.
With the team formed, and before signing the letter of intent, define clear due diligence goals. Establish “Go/No Go” milestones based on risk assessment, quantifying obligations, valuation review, and similar criteria. You can also gather and evaluate pre-diligence information from public sources. Frequent milestone reviews give the deal team checkpoints to pull the plug early if needed, limiting expense. Having articulated diligence goals enables you to create a data request template organized around these specific needs. Too often, deal teams are presented with a large data room, and in haste to dig in and begin evaluating the contents, they neglect making sure that the provided information includes everything needed to complete diligence.
A Virtual Data Room (VDR) is a given for any contemporary deal. However, not all VDRs are created equally. Simple consumer file-sharing sites should be avoided for security and tracking reasons. Within your own deal team, you should utilize rights management to monitor access to documents by individuals and advisors, and most importantly to segment information on a need-to-know basis. Rights management can help reduce exposure, especially around IP issues, should a deal fall through.
Increasingly, VDR’s are just as useful for Post-Merger integration (PMI) management. During the PMI process, insist that the seller use a VDR from a reputable provider that supports end-to-end collaboration from letter of intent to integration support.
Diligence information in a different language is another dimension to manage. Executives unfamiliar with multi-language operations may balk at the expense of professional translation and ask that commonly available machine translation (MT) services (such as Google Translate) be used. While MT has made significant progress, without review by a subject-matter expert in the source language, MT alone should not be relied upon for diligence decisions. A combination of MT and professional review can be used to compress the time required and reduce the expense for large volumes of information.
Establish Materiality Thresholds
Even with articulated diligence goals and information requests, it is easy to become overwhelmed in a large VDR with hundreds of contracts and agreements. You should establish materiality thresholds for individual agreements and areas of exposure. There is little value in reviewing the landscape maintenance contract for a tertiary facility that has a 30-day cancellation clause. This is even more relevant when contracts are in different languages. Similarly, there are lease abstracting services that simultaneously summarize key obligations and milestone dates while translating foreign agreements. By having clear materiality thresholds, your team can focus their efforts where risk and opportunity are the largest.
Especially relevant for global deals: Use the 24-hour clock to your advantage. There are limits to how long your deal team can work, and fatigue increases the risk of missing or misinterpreting information. Instead, have advisors and deal teams work in distributed time zones to follow-the-sun around the globe. Before concluding the work day, provide clear instructions and priorities to the next team, and have them do the same to their counterparts in the next region. This can provide at least “three shifts” to multiply the efficiency of moving through buyside due diligence.
Since culture and language are at the heart of cross-border deal, consider using in-person and over-the-phone interpreters. In a multi-cultural company, people are reluctant to admit that they do not fluently understand the language of the acquirer. When interviewing technical experts or specialists in a different country, providing an interpreter ensures that language does not create misunderstandings that may consume valuable time later in the deal to reconfirm.
Time is the enemy of the deal
Cross-border deals bring global opportunity with the complexity of regulation, culture, and language. By organizing early, you will have identified advisors familiar with unique employment and regulatory matters. As the deal evolves and increasing volumes of various documents require translation, this can become a deal-breaking bottleneck. When working with in-country counsel and foreign language documents, it is tempting to have local resources provide translation. Time is the enemy of the deal: Waiting for a local provider or your attorneys to translate large volumes of documents can put you at a competitive disadvantage. It’s best to work with a global, scalable, experienced professional translation firm to keep translation moving at the speed of your deal.
There is no secret sauce to efficiently completing comprehensive buyside due diligence on a target. The basic block and tackling of early organization starts the process on a smooth note and sets the tone for a proactive, in-control diligence process. Using technology and well-located advisors can help speed buyside due diligence. If you are interested in learning more, you can contact us and set up a demo here.
Donald Plumley is the CEO of Elanex. Don brings 25 years of global marketing, operational leadership and localization industry experience to Elanex. He was the Chief Marketing Officer and Senior Vice President at Bowne Global Solutions, from IDOC, the firm that launched BGS, through the initial industry consolidation over 10 acquisitions. Don created the brand and the global sales organization, and was behind the growth in sales from $20m to over $150m. Most recently Don was a principal at Bentō Strategy, a management advisory firm with focus in strategy and marketing.