Wednesday, March 12, 2014

Due Diligence - The Devil is in the Details

We continue our series of articles on acquisitions by looking at the topic of due diligence.

Due diligence, as many of you know, is the process of obtaining relevant information relating to a target (be it a company or other asset). It can be, for instance, a buyer seeking to buy or a bank evaluating the risks before lending.

Caveat emptor – “Let the buyer beware” is a fundamental legal principle that acquisition managers must take into consideration when making acquisitions. Expressed in other words, if you make a bad purchase without considering the relevant information, it is your fault.

In some sense there is no such thing as a bad deal provided that you have paid the correct price. The main purpose of due diligence is to help provide information so a buyer, a bank or an insurer can correctly price the asset, the loan or the insurance premium.

When performing due diligence it is crucial to identify the essential risk factors from a mountain of information. Equally important is the ability to provide practical solutions as to how risks are allocated amongst the parties to the transaction.

Therefore, due diligence should facilitate the decision making and be an important input into the structuring and documenting of a transaction.

Through proper due diligence a purchaser may avoid buying a devil that he was not aware of!