Buy-side due diligence

On this page, we explain the subject of buy-side due diligence (DD). What is most critical in a buy-side due diligence project? Is it important that your advisers have the right industry knowledge and understanding of the target company? Or is it better to work with experienced people that work daily on buy-side due diligence projects? Buy-side due diligence consists of several areas. On this page, we want to show you the bigger picture. We want to help you in structuring your buy-side due diligence plan. A good buy-side due diligence review is prepared by an experienced team from all areas of the target company. This will give you the feeling that you fully understand the target company and how an acquisition fits into your strategic growth plans. Here is an overview of the buy-side due diligence page:

• What is buy-side due diligence?
• The importance of buy-side due diligence
• The objectives
• How does buy-side due diligence differ from sell-side due diligence?
• When to start buy-side due diligence
• The various parts of buy-side due diligence 

What is buy-side due diligence?

Buy-side due diligence is a full and thorough review of the target company that a buyer wants to acquire. In this instance, the buyer needs to get a full understanding of the target company and the situation it is in. Buy-side due diligence (DD) can be described as the investigation and analysis to assess the suitability and the key issues facing a target company. A strong focus is on the financial business drivers that determine the historic and projected results. Buy-side due diligence runs through all business areas of a company.
In practice, buy-side due diligence can be done in a variety of ways. You can choose from a luxury approach where you spend a lot of time and hire many external advisers. You can also do a great deal with internal staff, but the risk is that your team gets stressed out as they must also do this next to their own jobs. You also should be clear on your objectives. Do you need the DD reports to get peace of mind regarding potential risks or do you mainly want to use the DD reports to get bank financing? On the one hand, we see cases where individuals spend a few days investigating the target company. On the other hand, within larger transactions, we often see specialized external firms that perform a full-blown independent buy-side due diligence process on behalf of the buyer. This is most often the case in very specific areas (like for example an environmental due diligence analysis).

The importance of buy-side due diligence

A detailed analysis of the target company is vital. You must be assured that you understand the target company fully and that your assumptions on the strategic rationale of an acquisition are correct. Further, you should be aware of the risks that exist in the company. The costs of an unsuccessful acquisition are high. The due diligence phase is the time when you can still prevent a failure with reasonable costs. Further, during the buy-side due diligence phase, you have time to start the preparation for post-acquisition integration. Hence, the work of external advisers needs to be well documented, so your team can complete successful integration once the company purchase has been finalized.

The objectives of buy-side due diligence

The objectives of buy-side due diligence are extensive. The buy-side due diligence process is much broader than just getting approval for a proposed acquisition. When done properly, a buy-side due diligence project provides valuable information to support the proposed acquisition. However, you as a buyer need to determine your objectives and what you want to get out of the investigation. Concisely, buy-side due diligence has the following objectives:

• Get a detailed understanding of the company you want to acquire
• Get an understanding of potenital risks in all areas of the organization (including legal liabilities or compliance issues)
• Check, fine-tune, extend the potential synergies and assign them to business owners (agree on a method to measure, calculate, and report the synergies). Most critical is that ownership of future synergies to be realized lands within the organization with owners that accept and own the individual synergies.
• Assess the future order intake and see if it matches the projected numbers
• Assess the competency of managers and senior business leaders
• Clearly identify business drivers that will be critical to the future success of the company
• Get a critical opinion on how realistic a purchase price is. In practice, the DD process often serves as a basis for further price negotiations
• Spot material deal breakers (now there is still time to stop a transaction)
• Get input for future legal documents such as a letter of intent and share purchase agreement (LOI and SPA)
• Achieve bank financing
• Input to fine-tune the business plan
• Prepare for post-acquisition integration

How does buy-side due diligence differ from sell-side due diligence?

The due diligence process is most often started by the buy-side. In the end, it is the buyer who wants to know more about the seller and needs to instigate a study. However, over the last decade(s) the advantages of doing objective due diligence by the seller have become more common. The main reason is that it has become clear to a seller that advantages exist in having an objective investigation and report being done on their own firm. A sell-side due diligence report can bring issues to light that a seller can still repair. Further, it will give a serious impression to buyers and ensure the due diligence process is run efficiently and in a concise time period where all buyers get most of the required information. Finally, it can also show possible upsides in valuation to a seller which can help in increasing the sales price. For more information on sell-side due diligence, please read about sell-side due diligence.

When to start buy-side due diligence

The buy-side due diligence process is normally costly and time-consuming. Hence it is essential to determine when the process should start. Normally, one can say that this happens after the first negotiations have occurred and an LOI is signed. On the page buying a business (/buy-business/process-buying-company.htm) you can get a better idea of when DD is normally conducted. It is wise to know how many companies perform a buy-side due diligence for your company. In the best situation, you have exclusivity and an agreed LOI with price and other conditions ready before you start the DD process. In most M&A projects these days a virtual data room (VDR) is made available. This gives buyers the opportunity to investigate the company from their own location. This can be sufficient for a concise first analysis. Generally, once an LOI has been drafted and signed, the full-blown buy-side due diligence should begin.

The various parts of buy-side due diligence

Buy-side due diligence can consist of several different areas. Before you start the project, you need to form a due diligence team. You need to allocate people (internal and external experts) in topics like finance, legal, taxes, environmental, IT and human resources. For each work stream, you need to determine if you work with internal or external people. Further, you need to agree on the level of detail and the format and method of reporting. To ensure that all bases are covered, you need to assign work stream owners and agree on the process, costs, timelines, working methods, deliverables, and critical issues. Each due diligence project is different. If you are looking at an acquisition with a lot of fixed assets, it is wise to have technical people on board. They inspect the facilities and capital equipment to ensure the buyer understands which capital expenditures will come up in the future. Nowadays, for larger acquisitions, a vendor due diligence report is often available that needs to be reviewed. Further analysis of the information provided via a VDR (virtual data room) needs to be done. Often, on-site buy-side due diligence also involves checking the target management team. This means a competent DD team needs to be available.

Information about the process of buy-side due diligence

Please get in touch for a free brainstorming session and feedback on your buy-side due diligence plans. We can discuss how a buy-side due diligence process can best be organized. We are open to giving you clear feedback on how to structure your buy-side due diligence process in your industry or country of choice. Further, we are also open to supporting you in the actual process and investigations.