The changing economic landscape has seen a definite shift in the level of due diligence carried out by prospective buyers of a target business. Potential bidders are now spending more time analysing a target business and are demanding more focused and meaningful reports from their legal and financial advisors. As a result, particularly when coupled with increased regulatory concerns, we have seen timetables lengthen considerably with deals now commonly taking anything between 9 to 12 months to complete – much to the frustration of sellers.
This increased emphasis on due diligence is partly due to market confidence, with buyers keen to ensure the valuation of the target is not overinflated, and partly due to a greater accountability on the part of senior management to ensure the acquisition delivers on its perceived value post-completion.
Increased accountability – senior management and in-house counsel
The purpose of due diligence has always been to flush out information in respect of a target business and flag potential issues which are then typically dealt with by making an adjustment to the purchase price and/or including suitable contractual protections in the sale and purchase agreement. However, prospective buyers are now spending significantly more time understanding the target at an operational and cultural level and planning how any associated risks with the target business will be managed and/or dealt with post-acquisition. As a result, we are seeing senior management and in-house counsel taking a much more active and decision-led approach to the due diligence process with the aim of making the post-acquisition integration as seamless as possible.
Legal advisors – managing the process
Due diligence has commonly been the task of junior solicitors with buyers viewing the resultant report as expensive and of little commercial value. However, the shift in focus since the economic crisis has seen the due diligence report take on a whole new significance with clients demanding a report that is more focused and commercially meaningful.
Solicitors are now working more closely with the buyer’s management teams to prepare a focused and valuable report as well as playing a key role in advising buyers how issues should be dealt with following completion.
In today’s market, senior management are under increased pressure to demonstrate that an acquisition has delivered on its perceived value. Proper preparation and planning at the due diligence stage should enable management to achieve operational and commercial synergies, keep costs in check and prevent unwanted valuation write-downs.
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