What Requests are Reasonable in Due Diligence for M&A?

Mergers and acquisitions are high-stakes transactions that require a great deal of due diligence. As part of the process, buyers and sellers must ensure that all of their contractual obligations are fulfilled. An essential component is ensuring that requests for information and documents are reasonable.

This guide to reasonable due diligence requests will provide an overview of what constitutes a reasonable request in due diligence for mergers and acquisitions and how to ensure that all parties have access to the information and documents they need.

It will also provide tips for making all requests promptly and efficiently. By reading this guide, buyers and sellers will be better prepared to make the most of their due diligence process and ensure that all parties are on the same page.

Overview of Mergers and Acquisitions

Mergers and acquisitions are the two main types of corporate transactions that involve one company buying another. In mergers, two companies combine to form a new company. In acquisitions, one company believes another company, often to acquire one or more of the other company’s assets.

The process of mergers and acquisitions can be complex and time-consuming. It can also be risky because if one or both companies involved in the transaction make bad decisions, the consequences can negatively impact many stakeholders. These include employees, customers, suppliers, communities, and stockholders.

Despite the risks, mergers and acquisitions are quite common in business. According to the Corporate Finance Institute, in 2017, there were more than 85,000 mergers and acquisitions globally. Out of those, more than 8,500 were deals valued at $100 million or more.

Mergers and acquisitions can create significant value for companies, their stakeholders, and the economy. For example, mergers and acquisitions help companies expand their operations by entering new markets. They also help companies increase their revenues and profits by taking advantage of economies of scale.

What is Due Diligence?

As part of an acquisition or a merger, the acquiring company undertakes due diligence on the target company. The due diligence process is designed to give the acquiring company the information it needs to decide whether to proceed with the acquisition or merger. It also helps identify any issues that may affect the transaction’s outcome. The due diligence process focuses on three main areas – financial, legal, and operational.

The acquiring company’s auditors conduct financial due diligence on the target company. This includes reviewing the company’s financial statements, contracts, and other documents. The company’s legal team undertakes due diligence on the target company. This includes checking the target company’s contractual obligations and legal documents, such as its articles of incorporation, bylaws, and licenses. The operational due diligence focuses on the target company’s operations.

This includes interviewing employees and managers and reviewing procedures and internal controls. The acquiring company also undertakes due diligence on itself. This allows the company to ensure that it can meet its contractual obligations under the merger or acquisition agreement. It also helps the acquiring company identify any issues that may affect its ability to complete the transaction.

Types of due diligence

Financial

The financial due diligence involves assessing the target company’s financial situation and financial statements. This includes reviewing audited and unaudited financial statements and any financial forecasts.

Legal

Legal, due diligence focuses on reviewing the target company’s contractual obligations and legal documentation. Operational due diligence includes assessing the target company’s operations, management, and internal controls.

Strategic

This due diligence focuses on assessing the target company’s strategic fit with the acquiring company. It can include strategic planning, marketing analysis, and competitive analysis.

What is Reasonable in Due Diligence Requests?

In mergers and acquisitions, the acquiring company and the target company enter into an agreement that outlines the due diligence process and the requests for information and documents that will be used to satisfy the due diligence requirements. The acquiring company usually sends a letter of intent to the target company.

In the letter of intent, the acquiring company outlines the information it will request from the target company. This includes a list of the requests for information and documents. The acquiring company and the target company then negotiate the terms of a letter of intent. This includes discussions about the requests for information and documents.

The due diligence provisions in the letter of intent govern the acquiring company’s requests for information and documents. This includes a list of what constitutes a reasonable request for information and documents during the due diligence process.

Suppose the acquiring company asks for something that is not a reasonable request. In that case, the target company should be able to bring the issue to the attention of the acquiring company’s legal team. The acquiring company and target company can use the negotiations on the terms of the letter of intent to discuss what they consider a reasonable request.

Tips for Making Reasonable Requests for Information and Documents

As part of the negotiations on the terms of the letter of intent, the acquiring company and the target company should discuss the types of requests for information and documents they consider reasonable. This will help to avoid disputes later on. Here are some tips for making reasonable requests for information and documents during due diligence:

• Make sure the recommendations are specific – The acquiring company’s lawyers should make the requests straightforward to narrow the scope of what they want to review
• Avoid requests overbroad or irrelevant – The acquiring company’s lawyers should avoid making requests overbroad or irrelevant
• Ensure the requests are not overly burdensome – The acquiring company’s lawyers should ensure they are not overly burdensome for the target company or its employees. Requests for information and documents should be reasonable in quantity

How to Ensure Timely and Efficient Requests

The acquiring company’s lawyers should make the requests for information and documents as specific as possible. This will help ensure that the target company’s employees respond promptly and efficiently to the submissions.

The acquiring company and the target company should use the negotiations on the terms of the letter of intent to discuss how they will share information and documents. The acquiring company and the target company should agree on the best way to share information and documents.

This includes how they will provide documents to one another and where they will send these documents. It is a good idea for the target company to send copies of all the information it sends to the acquiring company to its legal team. This will help avoid disputes over whether the acquiring company received the requested information.

Conclusion

Mergers and acquisitions are complex and time-consuming transactions. This makes it all the more critical for all parties to ensure that their due diligence requests are reasonable. This will help avoid disputes over what information is relevant and what is not appropriate.

All parties should use the negotiations on the terms of the letter of intent as an opportunity to discuss what they consider a reasonable request. This will help to avoid disputes during the due diligence process.