A book review, also known as due diligence, aims to validate the assumptions underlying the proposed transaction, identify risks, and assess the financial performance and robustness of the business to be acquired.
The intended transaction and due diligence is approached from the understanding between the parties as set forth in the letter of intent. There are many different due diligence investigations that can be of interest to a company; investigations can address financial, IT, tax, legal, HR, business, competition, insurance and risk management.
A financial due diligence review looks at the complete financial picture of a company with the goal of gaining a deep understanding of the business model, financing structure and existing or anticipated risks.
Drivers of due diligence
In practice, due diligence does not often lead to a deal being called off, but adjustments are regularly made to the sales price or other conditions, or warranties and indemnities are included to limit risks for the buyer. Some examples of issues for which adjustments are made include: outstanding damage claims or ongoing disputes with customers or suppliers, payment delays or the phenomenon of leakage.
The latter term indicates whether there is erosion of shareholder value in the period between pricing and signing the binding purchase agreement. All of these examples show that due diligence should be an integral part of a transaction to identify significant risks. A buyer is not waiting to resolve a dispute with a supplier along with the additional (financial) consequences.
Within the sales process, building a relationship of trust with the buyer or seller is essential. A due diligence can provide answers to important questions and thereby confirm with reasonable probability the seller's claims and the associated relationship of trust. Also, the results and findings of a due diligence provide a better starting point for further negotiation of the final transaction documentation.
Vendor due diligence
Typically, due diligence reviews are conducted for a buyer to validate the assumptions used and to minimize risk. Increasingly, book examinations are also performed for selling parties before the sales process has begun.
A (vendor) due diligence investigation serves as preparation for the sale, allowing the seller to retain part of the control and whereby the company is critically analyzed and measured against a yardstick prior to the sales process. This is to minimize surprises during the sales process and to increase the chances of better quality offers. This is pleasant for both parties, so there will be fewer unforeseen warranties, indemnities or adjustments to the sales price so that negotiations can proceed smoothly.
Virtual Data Room
Often, due diligence investigations are conducted from a virtual data room in which the requested and required information is provided by the seller and can be assessed by the buyer's team. In this data room, things are set up in a structured manner and a data and log book is kept, which is of legal value in the final transaction documentation.
