This is the final installment in a three-part series Rock Fusco & Connelly, LLC will be publishing on using M&A transactions to maximize and grow your company’s value. In part one, we helped you understand EBITDA, and how to increase EBITDA and its multiplier. In part two, we addressed how to compare rates of return from M&A deals with internal rates of return and various M&A strategies. In this third installment, we will discuss the due diligence process and the types of diligence you may perform before closing an M&A transaction.
Letter of Intent
The first step of any M&A transaction is the letter of intent (LOI). While non-binding, the LOI is an extremely important document. Typically, it will outline a preliminary valuation, expected timeline, and most significantly, exclusivity. Due diligence is a time-consuming and costly process, and the exclusivity clause indicates the seller cannot have simultaneous discussions with other potential buyers during a defined period while you are conducting due diligence. This preserves the potential investment of costly due diligence.
Types of Due Diligence
Your company may conduct all or some of the following types of due diligence in preparation for an M&A transaction:
Legal Diligence. In addition to contributing to the LOI, your legal team may review customer, supplier, employee contracts, regulatory considerations, and organizational documents. The legal team may also draft the purchase and sale agreement and related documents.
Financial Diligence. Your financial team may help you evaluate the seller’s financial trends and identify potential exposures or opportunities regarding the EBITDA presented by the seller.
Tax Diligence. Your tax team may evaluate potential tax liabilities that could carry over to you as a buyer and identify potential structuring opportunities that could result in the transaction having a more favorable tax treatment for your company.
Operations Diligence. Your operations team may evaluate the seller’s key metrics and operations.
Customer Diligence. You may engage a team to evaluate how “sticky” the seller’s customers are and whether they are likely to continue doing business following the transaction.
Environmental Diligence. An environmental team can help evaluate whether there are potential environmental liabilities that must be remedied prior to or after closing.
Insurance & Benefits Diligence. A specialized insurance team can help analyze the seller’s insurance and benefits and how they compare to your benefits as well as understand if any changes will need to be made post-closing.
IT Diligence. An information technology team may evaluate the seller’s current systems and policies, consider whether they are optimal, and determine if they will easily integrate with your company’s systems.
For help with all your M&A and corporate securities needs, please reach out to the attorneys at Rock Fusco & Connelly, LLC.