What is the due diligence process?

What does it mean to conduct due diligence? In a merger or acquisition, due diligence (DD) is when target companies are put under the microscope. The due diligence process is a structured approach to carefully examining every part of the business.

The process of undertaking due diligence is highly involved and can be a significant undertaking. Here, we’ll break the process down into 6 simple steps, give you access to our definitive checklist, touch on some different types of due diligence and give you the secret to super-charging your due diligence process.

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How do you perform due diligence in M&A?

Due diligence is the process of examining all aspects of a corporate transaction to ensure both the buyer and seller are fully aware of what is on offer.

Here’s our 6-step due diligence process for successful M&A.

1. Prepare documents

During the due diligence process, potential bidders carefully scrutinize every aspect of the target company.

To do this, they will methodically review all the documentation relating to each subject, from the business plan to real estate and cash flow - and everything in between. To ensure due diligence runs smoothly, sellers must first prepare all these documents, organize them and ultimately make them available to bidders.

If prospective buyers find gaps in the documentation, it can hold up due diligence and increase the risk of the deal failing.

Sellers can ensure their information is complete and well structured by downloading Ansarada’s free, definitive due diligence checklist.
 

2. Set up a virtual data room

As you will be sharing huge amounts of sensitive documents for review and managing a complex due diligence Q&A process, you need a secure environment for organizing and sharing documents, as well as communicating with and tracking your potential bidders.

Virtual data rooms are highly secure online environments for doing just that. Unlike normal file-sharing solutions, virtual data rooms are purpose-built for high-stakes deals like M&A transactions.

Despite their power and scale, a good virtual data room can be set up very quickly without any specialist knowledge.

Learn more: how to set up a virtual data room.

3. Share documents

Disclosure of critical business information is fundamental when conducting due diligence, whether it’s for document review by the bidders or the extensive Q&A process.
It begins with sharing all the documents collected and prepared in advance.

When sellers use a purpose-built virtual data room, sharing documents can be as simple as setting the right reading permissions for authorized users; they couldn't be simpler to use for the buyer and seller.

The document security and role settings in Ansarada Data Rooms make it easy to grant the right people access to documents individually or at the folder level. When access is no longer permitted, you simply revoke permissions inside the data room and out of it.

4. Document review

Much of due diligence will consist of potential bidders systematically scrutinizing each document shared with them, like confidential financial statements.

The whole point of the exercise is to be thorough; you can expect bidders to begin building a comprehensive list of questions for the Q&A component of the due diligence process.

Sellers will have less control over the document review process, but can take steps to adequately prepare for it by compiling and organizing all the relevant documentation in advance. This is crucial to the successful completion of this stage.

5. Due diligence Q&A

The back and forth between bidders asking questions and sellers responding is the most intense stage of the due diligence process. As much as 70% of deal time can be spent on Q&A.

Throughout due diligence Q&A, bidders will ask questions to the seller who then directs the question to the right team member to draft an answer. The answer will come back to the relevant bidder once it’s approved by the seller.

With multiple bidders and thousands of documents that questions can be about, Q&A can be a complex and time-consuming process without clear roles and workflows.

Centralizing the due diligence Q&A process within the virtual data room makes sense. This places it in the same environment as the corresponding documents and it makes it easier to assign, track and follow up questions. This is especially true when you have multiple bidders asking questions.
 

6. Post due diligence reporting and compliance

Due diligence is a time for extreme caution - that’s really the point - but being careful shouldn’t end once the ink on the contracts is dry and the deal is done.

You still need to satisfy any compliance requirements you have, ensure you have a reliable audit trail and provide any proofs of disclosure required.

Ansarada's Data Rooms are purpose-built to run the due diligence process from start to finish as securely, quickly and effectively as possible to maximize your outcomes (make sure you get the highest purchase price) and minimize your risks.

How to conduct due diligence on a private company

Every M&A deal is unique, depending on the size of the business, the stakeholders, culture, and industry. One factor that can make transactions more complex and the due diligence process more complicated is when a company is private.

Unlike publicly traded companies, investors cannot easily buy shares unless they are founders, employed there, or are involved via venture capital or private equity firms. This makes it more difficult to perform due diligence on a private company because they are not obligated to publicly disclose as much information.

The best advice we can give you for undertaking due diligence on a private company is to know exactly what to look for. Using a due diligence checklist will ensure no stone goes unturned, you will be able to spot gaps in compliance and process easily, and you can have greater confidence in your investment or purchase.

Due diligence examples

We cover various types of due diligence in detail elsewhere in our DD knowledge hub. However, in the M&A world, you can expect to see the following due diligence examples:

• HR due diligence
• Financial due diligence
• Legal due diligence
• Intellectual property due diligence
• IT due diligence

In essence, these are the aspects of the business under examination during the due diligence process.

Streamline your financial due diligence process with AI

Now you know the basics of how to carry out due diligence. Want to take it up a notch?

Data is the oil of the digital age; it has become perhaps the most significant driver of growth and disruption. But it’s increasingly difficult to find risk-relevant information within short deal timeframes.
Thankfully, artificial intelligence, or AI, can now facilitate the due diligence process. AI due diligence is faster, heavily data-driven and therefore more likely to result in a successful and profitable outcome. 

Ansarada’s AI tools can analyze the real-time flow of data from interactions between bidding parties in a deal, including huge volumes of information. This enables dealmakers to garner value from tens of thousands of data points in seconds. They can also automate hours of manual work to save significant time and cost.
Imagine how fast this could make your financial due diligence process. With Ansarada, you can analyze a business' financial performance in minutes instead of days.