In Alice’s Adventures in Wonderland, Lewis Carroll created a topsy-turvy world peppered with riddles and puns. That world may feel familiar to anyone who has gone through the due diligence process, where opportunities for misunderstandings are rife. The goal, however, of due diligence is to demystify and clarify, which can best happen when the parties rely on process, structure and well-articulated expectations around the transaction.
With that in mind, here are six helpful tips for parties engaging in due diligence related to a transaction:
- Set expectations and commitments at the start.
Whether a term sheet, memorandum of understanding, letter of intent or other form, use this document as an opportunity to set each party’s expectations for a prospective transaction. Think about not only terms and conditions governing an eventual transaction, but also commitments in due diligence and during the negotiation of a definitive transaction. The clearer the expectations and commitments, the more likely the parties will be able to reach a timely close with a better view of each side’s relative needs and wants for the deal. To that extent, please see our May 2021 post on 5 Best Practices for Deal Formation.
2. Be clear about a timetable, and how to adjust it.
Set a timetable from the start not only for documenting a definitive set of transaction documents, but also for due diligence. Think about how long to give for building the data room and phasing the upload of different documents, records and materials. Due diligence will especially correlate to the parties’ respective representations and warranties and the qualifications and limitations applied to them through language and disclosure schedules. Ensuring due diligence is ready and sufficiently reviewed at this crucial juncture will therefore be important.
3. Outline pertinent documents, records and materials.
Part of setting expectations includes the parties’ categorization of information, records, documents and materials that ought to be included in the data room. Critically, the parties should set their expectations for the quantities and types of due diligence that will be needed. Consider those instances when summaries may be sufficient rather than source documents.
4. Set who for each party will constitute the core responsive team.
When considering which individuals to incorporate during the transaction, consider which executives, key personnel and employees, lawyers, accountants, and other professionals to include as part of the due diligence process. A core team will help control the flow of information and help prevent confusion, misunderstandings and lack of sufficient knowledge and communication. Equally important, think about setting a calendar for meetings to discuss due diligence in a manner that prevents undue disruptions to business and operations.
5. Identify third parties that may be necessary to the transaction.
Depending on the transaction, consider whether you may need to include third parties like customers, licensors and licensees, consultants and advisors, and perhaps even regulatory bodies and agencies. Think about establishing the materiality thresholds for third parties if they’re thought necessary to due diligence.
6. Identify pertinent regulatory agencies.
As an additional consideration, there are safeguards and regulatory requirements that might arise in consequence a potential transaction. For example, a purchase of a business division or all or substantially all the assets of a business may fall within the purview of Federal and State regulatory bodies. Think about notices and other requirements that may be owed to these bodies, including the Securities and Exchange Commission (SEC), Antitrust Division of the Department of Justice (DOJ), and the Federal Trade Commission (FTC).
This shortlist outlines some basic requirements for an efficient transaction, although certainly not every consideration the parties may have to make.
Whether your business needs assistance in a transaction or due diligence, contact Baker Jenner to schedule a consultation today. The team at Baker Jenner LLLP is here to be your guide through the “Wonderland” of M&As. Call us at (404) 400-5955 for professional, precise counsel for your business needs.
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