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InvestmentBank.com | Rapid Due Diligence: Why Fast DD is Essential for Deal Closure Success
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25 Sep Rapid Due Diligence: Why Fast DD is Essential for Deal Closure Success

It ain’t over ’till it’s over.

Once the Letter of Intent (LOI) for a business transaction has been double-signed by both buyer and seller, the real work begins. Unless the fat lady has sung, the deal could still fall apart like glass. One of the best ways to keep both parties focused on the task at hand and ensure botched due diligence doesn’t end it a deal blow-up is to ensure the due diligence is as short as possible.

I would liken due diligence to the decision to get married. First you date through the initial introductions and then you semi-commit with the LOI. The real marriage doesn’t occur until after you really sift through and make sure there are no skeletons in the closet. That’s what due diligence is all about: it’s the final father’s interview and consent before he gives his daughter away to a potential stranger. As the saying goes, “you go into dating with eyes wide open and enter marriage with eyes wide shut.” In other words, you should try very hard to find all the weaknesses you can before you consummate the deal because once you sign in blood, all bets are off.

In pushing a rapid due diligence, it doesn’t mean the key aspects of the deal aren’t reviewed and scrupulously examined. In fact, it often means the opposite. Forcing a rapid due diligence between both buyers and sellers forces all the proverbial cards on the table more quickly. If the seller is truly prepared to sell the business, then the buyer’s due diligence information request list should produce a very rapid onslaught of meaningful and important documents, providing all the necessary information to ensure the seller isn’t acquiring a lemon. Here are some of the most blaring reasons due diligence should be rapid:

  • You have to strike while the iron is hot. The longer a deal drags out, the colder the opportunity becomes, the less interested both parties become in working with each other. The honeymoon phase is short in M&A and once the sparks wear-off, the marriage doesn’t last, especially since it hasn’t even been consummated yet.
  • More skeletons–and more likely excuses–arise the longer a deal’s due diligence drags on. Every business has them, but the key is not to give the buyer more time to keep finding more and more excuses whose combined total make them feel like they’re getting the raw end of the deal.
  • Speed begets speed. Have you ever personally noticed in your own life that it’s when you have the most to do, that the most gets done? The same holds true here. Some buyers might whine, “but we need plenty of time to ensure we’re combing through everything we need.” If the seller is prepared, that’s just not accurate. Most the required documentation can be provided quickly, but feet-dragging is the natural state of most buyers. As an advisor representing the seller, it’s our duty to eliminate such a tendency.
  • Speed is part of being disciplined. Without a deadline, nothing gets done. Period. It has nothing to do with getting a bad deal. It has everything to do with maintaining focus on the end-goal: deal closure.
  • It’s a mental thing. It’s like a goldfish who grows to occupy the space he is given. Due diligence can be as short or as long as you let it. Get it and get ‘er done.

When we refer to quick due diligence, most often the term length after a double-signed LOI would be between 30 and 60 days. 90 days is not ideal, but–from our personal experience–anything north of 90 days does not bode well for ensuring a high probability for deal closure. In fact, it drops closure probably down to less than 1/2 according to our own internal numbers. I understand that much of this depends on the size of the deal, ancillary terms and other provisions, but a generally good applicable rule is to make things go as reasonably fast as possible.

  • Victor Allison

    Agree if I’m representing the seller. But, if I’m representing the buyer, pushing them into a DD period shorter than they’re comfortable with seems like an invitation to a lawsuit if any skeletons are uncovered after they close escrow.

    • Nate Nead

      Certainly. Long enough to cover all the buyer may require, but short enough that the buyer doesn’t hold the seller over a barrel to try to renegotiate when truly nothing is found. If there is concern, the buyer can also couch such in Reps & Warranties.

  • I truly love the concept but, in the real world, unless it’s a tiny assets deal (say, under $5 million), despite however well prepared the seller may be, NOTHING will expedite due diligence faster than the collective attorneys of record are willing to agree (to agree). My experience is that anything less than 180 days is usually fraught with superfluous indemnifications, reps & warranties and post-acquisition adjustments to seller paper, price/terms adjustments, and so on.

    • Nate Nead

      This certainly applies more so to deals on the smaller side. Superfluous reps and warranties are a direct result of inadequate due diligence. In most cases, it’s a holistic balance between the necessity of getting a deal done and getting all the cards on the table. Excellent comments.