The stages in a diligence exercise could be broadly divided into two stages — preliminary investigation and conclusive investigation.
PRELIMINARY INVESTIGATION – Diligence from publicly available information:
- Preliminary investigation also known as business due diligence, is undertaken primarily to assess the commercial feasibility and the synergy emanating between the organisations (acquirer and target). The target’s business potential is estimated by evaluating its brand value, distribution system, market share, profitability and other economic considerations.
- Obtaining these detailed requires one to tap the secondary resources for obtaining information from off-site locations. Meeting competitors, distributors, bankers and material suppliers are some of the ways employed by the acquirer to get a feel about the target’s competitive business strength and financial standing in the market.
- It is difficult to state at which stage the investigation should be regarded as complete, there is no definite answer. But when one can comfortably make a firm recommendation either not to proceed further, or to start deal negotiations; that would be the ideal time to bring the review to a close. If the outcome be positive it is essential that the understanding agreed upon be reduced in writing either through a MOU or other like agreement with the target company. Such an agreement will give the target a sense of confidence about the intentions of the acquirer and will lead him to co-operate and share further information required to conclude the investigation. The agreement, however, should include a preliminary negotiated value of the acquisition based on the representations made by the target and also a list of key actions and investigations that will need to be undertaken for completing the acquisition.
CONCLUSIVE INVESTIGATION – After entering into a Term Sheet or similar form of an agreement
This investigation is nothing but verifying the company’s representation and justifying the value of the acquisition proposed in the beginning. The verification involves examining various facets of the business such as technical, legal, environmental, tax, human resource, technical, system and accounting, the emphasis of which can change depending on the critical business factors.