When a company becomes an acquisition target, the due diligence process begins with a long and detailed request for specific information. It may come from a broker, investment banker or potential buyer.
The requested information goes into a marketing book to present to potential buyers. While this marketing tool provides a small amount of information about many aspects of the target company, this data is just the tip of the iceberg. Due diligence is generally broken into categories on a checklist
Financial and marketing
The finance and marketing aspects of due diligence take longer for a company that has been in business for a while, because potential buyers may want to see financial statements going back to the company’s inception, if possible. With this raw data, an investment banker can develop historical financial and marketing metrics to compare to those of other similar businesses on the market. Interested parties will use the data to develop a bid.
Legal and insurance
Legal diligence involves tracking down the original version of significant contracts and leases, disclosing any pending or potential lawsuits and careful scrutiny of the company’s operating agreements. A potential buyer will also want to be sure that all appropriate insurance policies are in force.
Human resources
The human resources department will provide payroll data, salary and bonus information, education history and employee demographics. A potential buyer of a service company is basically purchasing the staff and their abilities, so they are very interested in this piece of the diligence.
Once the due diligence is complete, potential buyers will begin submitting offers. When the seller accepts an offer, the attorneys for both sides get to work on a sales contract. If buyer and seller make it to the closing table, the transition can begin.