Over the past weeks, several of you asked me about the classification of the financial due diligence within an M&A transaction. So, let’s discuss this topic here.
You may have heard or learned about the M&A process in general. And maybe also about the different types of financial due diligence assignments that exist. So, today, I’ll combine those two frameworks.
The M&A process
The — simplified — M&A process from a seller’s perspective contains the
- preparation phase,
- due diligence phase,
- negotiation phase; and the
- close-down phase.
There are differences in each process. Sometimes only one or two potential buyers are selected. Sometimes it’s more comparable to an auction process with many potential bidders.
The due diligence spectrum
The due diligence services depend on whether you are working on the buy- or sell-side.
As a buy-side advisor, there’s typically a red flag due diligence and a confirmatory due diligence. The red flag due diligence is based on publicly available information or limited information provided by the target. Whether a red flag or a full scope due diligence is performed, also depends on the purpose of the report. If used for financing purposes, banks often request a full scope due diligence.
On the sell-side, you might work on a vendor assistance, financial factbook, or vendor due diligence. In a vendor assistance, you support the buyer by presenting his figures. There is no or only little commentary. A financial fact book is a report showing management’s view of the figures. It also contains the corresponding commentary. Here, the due diligence provider acts on behalf of the seller. In contrast, a vendor due diligence (VDD) gives reliance to the future investor. So, it does not only reflect management’s view but also the views of the due diligence provider.
Let’s combine the process and the different due diligence services
So, during the preparation phase of the M&A process, one of the sell-side products could be prepared. If the seller wishes 😉 Commonly, this would be the financial factbook.
In the due diligence phase, a red flag would be performed. This is followed by handing in the non-binding offer. Afterward, a confirmatory due diligence is prepared. This is if there is access to significant new information. After that, the binding offer follows.
As you can see, the services always depend on the exact structure of the M&A process. Depending on the service and the exact process, also the time commitment differs. As a sell-side advisor, you’ll be working weeks or months on an engagement and get to know all these different phases. A buy-side engagement can be significantly shorter. Again, all this depends on the data provided as well as the structure of the process.
Hi, I am Jan, creator of the blog https://passion-for-finance.com/