Checklists for Due Diligence

Peter Howson

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351952484
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

If you are buying a company how can you be sure you are buying the business you think you are? Are you sure it is as good as the seller says? How can you be certain unexpected costs and obligations will not suddenly appear once you are the owner and responsible for them? How best can you arm yourself for the negotiations? Designed to help you make your due diligence process as smooth and effective as possible, this collection of checklists by acknowledged expert, Peter Howson, will ensure you manage the risk aspects of any acquisition. The author takes you through the due diligence process itself from legal, financial and commercial to employment and IT, and guides you through the collection. Each checklist includes a short introduction that enables you to make the best use of the material. Due Diligence is, by its nature, a process for which checklists are a wonderful source of ideas and reassurance. Peter Howson's checklists (all of which are repeated in PDF form on a CD included with the book), is a must-have reference for anyone contemplating a merger or acquisition, a management buyout, joint venture or other risky business transactions involving third parties.

Introduction

Due diligence involves getting the answers to lots of questions in a short time. The checklists in this book provide most of the questions that a buyer could ask. The skill with checklists is using them wisely.

There is little likely to annoy a target more than being given a long list of questions that are not relevant, or being asked for the same information three or four times.

As every transaction is different, not all of the questions will be appropriate for every deal. The checklists should be edited and modified for the transaction rather than used blindly. The areas to cover and the depth of coverage are a matter of judgement and depend on a buyer’s knowledge and how much risk he or she attaches to areas where his or her knowledge is limited.

Also, the checklists in this book overlap. For example the financial due diligence checklist contains questions about employees and tax, but there are also separate checklists covering human resources and tax. It is up to the purchaser to use whichever are appropriate.

The best way of keeping the checklists relevant is to keep the objectives of due diligence in mind. Given the Anglo-Saxon principle of ‘caveat emptor’ and statistics which suggest that most acquisitions fail, due diligence is useful to the purchaser in four ways:

1. As an aid to identifying potential liabilities.
2. As a supplement to the legal protection that may be obtainable against those potential liabilities.
3. As an aid to ensuring a successful transaction.
4. To supply complete and reliable data in a public offering.

As an AID to Identifying Potential Liabilities

As a general principle, negotiations between buyer and seller seek to apportion liabilities between the two parties. Liabilities whose origin is pre-transaction belong to the seller and those whose origin are post-transaction belong to the buyer. One of the basic aims of due diligence is to help the buyer identify those potential liabilities so that it can deal with them in negotiations.

As A Supplement to the Legal Protection that May be Obtainable Against Those Potential Liabilities

There are three problems with relying on contractual protection such as warranties:

1. Difficulties of proving either that there has been a breach or that there has been a loss resulting from it.
2. A warranty will not normally apply if breaches of the topic in question have been disclosed.
3. A guarantee is only as good as its giver. If the sellers are not particularly creditworthy or have moved their assets to an offshore jurisdiction, getting them to pay up may be difficult if not impossible.

Comparatively speaking, due diligence is cheap, litigation is not. This is why buyers are more comfortable knowing about problems beforehand rather than being left with the possibility, however remote, of making warranty or indemnity claims or having to sue the seller after completion.

As An AID to Ensuring A Successful Transaction

Most acquisitions fail to deliver the benefits expected of them. Due diligence should be structured not just to get the deal done but also to maximise the chances of a successful transaction. A common mistake is to be too obsessed with the financials to the detriment of other areas. Due diligence should be an aid to understanding the business being bought, its business model, the market in which it operates and, therefore, its prospects. Acquisitions where cost cutting is the only objective are rarely successful. An integration plan which shows how the benefits are to be delivered should be developed in advance. Due diligence can provide a lot of the data and analysis needed.

To Supply Complete and Reliable Data in a Public Offering

Due diligence for an offering of securities is different than for an acquisition. The focus is on complete and reliable information so that sponsors do not misrepresent to potential buyers.

A due diligence programme should have five strands which the checklists should reflect:

1. The verification of assets and liabilities.
2. The identification and quantification of risks.
3. The protection needed against such risks which will in turn feed into the negotiations.
4. The identification of upside potential and synergy benefits.
5. A strong input into post-acquisition planning.

And due diligence should address the ‘soft’ issues such as cultural compatibility and management succession as well as the ‘hard’ issues such as the legals and financials.

Much of the information will come from interviews. Open ended questions are best. Ask the question. Shut up. Listen. Bad interviewers are the ones who spend forever asking the question then end up answering it themselves. Where interviews are face to face it is useful to have two interviewers; one to listen to the answers and one to watch the body language.

A popular misconception of due diligence is that it is a process of enquiry designed to unearth deal breakers. This should not be what due diligence is about. Any deal breakers should be addressed before detailed negotiations begin and the parties engage expensive advisers.

Finally, do not be fooled into thinking that a process driven checklist approach to due diligence is the answer. Most important of all is understanding. Buyers have to have a process and checklists are very useful, but the objective is not just to ask the right questions but to achieve a real understanding of the target company.

CHECKLIST
1 Buyer Pre-Due Diligence

The sensible starting point for due diligence is due diligence on yourself, the buyer. However stupid that may sound at first, simple answers to some of the more obvious questions can help prevent wasting a lot of time, money and effort.

What is the business strategy?

How do acquisitions fit into the business strategy?

Does the target fit the strategy?

Have we carried out sufficient pre-acquisition planning?

Are we sufficiently prepared for the due diligence exercise?

• Who is managing the process on our side?
• Which areas are we going to investigate? Why?
• Are we giving enough attention to the ‘soft’ areas like culture and management?
• Do we know what we really need to know in each area of investigation?
• Do we have enough time to complete the process? If not, what are we going to do about it?

Do we have the information to brief advisers properly?

Where are the synergies going to come from? Have we tried to quantify them in detail? What further information is needed?

Have we set a walk away price?

Have we worked out an adequate implementation plan especially for the human resources issues? For example:

• How will individuals be chosen to fill available positions?
  1. – What are the selection criteria?
  2. – Who will make the decision?
• Will incentives be needed to keep talent in place?
• When will we work out who will be surplus to requirements?
• Have we worked out the termination packages and the timing of terminations?
• Have we a communication plan in place to deal with staff changes?

Have we considered any organizational re-design opportunities the acquisition creates, for example outsourcing as an alternative to in-house resources?

Have we explored all the consequences of the deal, for example the effects on current operations, existing personnel, the industry and competitors?

What is our attitude to risk? Is this the same for all types of risk?

Have we set materiality limits for the due diligence investigation?

Have we explained the process to the seller?

Have we agreed access to people and documents with the seller?

Are we clear on what we want from whom, when and in what form?

CHECKLIST
2 Selecting (and Working with) Advisers

Discuss the proposed acquisition internally and due diligence with those most likely to be involved in and affected by it.

Make sure everyone who needs to understand is clear about what due diligence is about and the advantages of bringing in advisers and what they are expected to do.

Decide

• On a timetable.
• Who will manage the process.
• Who will be the main contact for the advisers.
• Whether to set up a management team/steering group.
• Who will prepare and agree the initial briefs.
• Who will choose the advisers and on what criteria.
• How to keep everyone in touch with the progress of the acquisition/ due diligence process.
• What the main concerns are.
• What due diligence needs to be carried out.
• The key issues and main areas of concern for each area of due diligence.
• Whether due diligence ought to be phased, for example by carrying out commercial due diligence before commissioning the more expensive financial and legal due diligence.

Identify the problems that may arise during the course of the due diligence process and during the course of working with your advisers.

Ask potential advisers to sign confidentiality agreements then discuss the proposed transaction with them drawing on any previous experience they may have of this type of transaction. Get an idea of costs and timescales.

Draw up a high level scope for due diligence which covers the issues you feel need to be covered and send to potential advisers with a request for formal proposals.

Compile a criteria checklist for choosing advisers.

Check references, if given.

Check that advisers have understood the brief.

Discuss Further with the Most Pr...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• 1 Introduction
• 2 CHECKLIST 1 Buyer Pre-Due Diligence
• 3 CHECKLIST 2 Selecting (and Working with) Advisers
• 4 CHECKLIST 3 Briefing Advisers
• 5 CHECKLIST 4 Information to be Requested from the Target
• 6 Financial Due Diligence
• 7 CHECKLIST 5 Financial Due Diligence
• 8 Legal Due Diligence
• 9 CHECKLIST 6 Legal Due Diligence
• 10 Commercial Due Diligence (CDD)
• 11 CHECKLIST 7.1 Commercial Due Diligence (CDD) Checklist for Initial Management Meeting
• 12 CHECKLIST 7.1.1 Assessing the Target’s Market Strategy
• 13 CHECKLIST 7.2 A Full CDD Exercise
• 14 CHECKLIST 7.2.1 Determining Key Purchase Criteria (KPCs)
• 15 CHECKLIST 7.2.2 Five Forces
• 16 CHECKLIST 7.2.3 Resources and Capabilities
• 17 Human Resources Due Diligence
• 18 Checklist 8 Human Resources Due Diligence
• 19 Management Due Diligence
• 20 Checklist 9.1 Management Due Diligence
• 21 Checklist 9.2 Management Competencies
• 22 Checklist 9.3 Competency-based Interviewing
• 23 Pensions Due Diligence
• 24 Checklist 10 Pensions Due Diligence
• 25 Taxation Due Diligence
• 26 Checklist 11 Taxation Due Diligence
• 27 Environmental Due Diligence
• 28 Checklist 12 Environmental Due Diligence
• 29 IT Due Diligence
• 30 Checklist 13 IT Due Diligence
• 31 Technical Due Diligence
• 32 Checklist 14 Technical Due Diligence
• 33 Intellectual Property Due Diligence
• 34 Checklist 15 Intellectual Property Due Diligence
• 35 Antitrust Due Diligence
• 36 Checklist 16.1 Merger Control Filing Requirements
• 37 Checklist 16.2 Antitrust Risks Posed by the Target’s Activities
• 38 Insurance and Risk Management Due Diligence
• 39 Checklist 17 Insurance and Risk Management Due Diligence