Due Diligence: Getting Started on M&A Diligence

Getting Started with Due Diligence

The first step in preparing for diligence is often deciding what the deal or project will be called.  ​I am an advocate for creating code names for the deal and each of the participants.  The purpose of this is twofold.  First, it provides an additional layer of security against information leakage during the critical and confidential period prior to announce (you would be surprised how much I overhear about deals in airports, hotels, and coffee shops!).  Second, assigning names outside of the terms used in daily discussions helps to produce a “fresh” approach to diligence, shake resources out of their day-to-day thinking patterns, and define the acquisition as a project.  Have some fun with it.  Why not a Project Cheeseburger with parties such as Pickles and Mayo?
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Regardless of whether you choose to use code names or maintain the actual names of the parties you will need a robust on-boarding process for diligence that features the following:

Due Diligence Preparation	What to Include
Non-Disclosure Process	A robust non-disclosure process ideally includes not only signing an NDA agreement, but also requires completion of a 30-60-minute training course outlining the confidentiality expectations of participants for both internal and external disclosures of information.  Be sure to include directions for talking to common customers, suppliers, trade organizations, and other third parties with which both companies may routinely communicate.  Make expectations clear, and information leaks should be minimal
Gun-Jumping Prevention/Regulatory Compliance	Gun-jumping training materials, preferably compiled by corporate or outside counsel.  These should explain clearly that integration activity cannot commence prior to change of control and should also help participates clearly distinguish between integration planning, day to day operations, and integration execution.  Note that the first two activities are usually permitted subject to certain restrictions.  The gun-jumping training should ensure that everyone has clarity on what is permissible prior to regulatory clearance in each applicable geography.
Kickoff	Prepare a detailed due diligence kickoff presentation outlining the participants, governance structure, process, tools, and timeline for diligence.

Program Structure

It is advisable to set up your acquisition program structure in advance of diligence.  Even if the acquisition doesn’t go through, the effort undertaken to setup a subsequently-abandoned program pales in comparison to the wasted effort and potential risks of trying to run diligence with no structure in place!  

There are 2 basic ways to organize an acquisition program.  The first is an objective structure, where various cross-functional “tiger teams” are formed to accomplish program objectives.  If your resources are accustomed to being allocated to various projects with different leads and objectives on an ongoing basis (i.e. similar to Google) you might prefer an objective program structure.  The second is a functional structure, where the teams mirror the traditional internal functions of the company (finance, technology, marketing, etc.).  A functional structure has the advantage of being much easier to setup and govern than an objective structure, because accountability rests with functional leadership for both ongoing operations and integration activity.  For this reason, functional structures are far more common than objective structures.  Regardless of which is selected be sure to consider whether performance measures, compensation, and/or incentive structures need to be adjusted to reflect changes in responsibilities.

Steering Committees

A steering committee or committees is the preferred method of program governance.  The key idea for “steerco” setup is that the steering committee members must either be C-suite executives or have access to the C-suite.  Smaller companies often have the CEO, CFO, etc.  serve on the program steerco.  Larger companies often opt to have C-suite direct reports on an operating steerco, with the C-suite resources instead serving on an executive committee that meets less frequently to take major updates, greenlight decisions, and manage high-impact escalations.  For diligence purposes it may be appropriate to have a higher level of executive sponsorship on the steerco, and then have a direct report delegate take over later in the process. 

If you are using a functional structure, the steerco will be easier to design.  Simply pull an executive from each function to represent his or her group.  If you are using an objective structure, forming an effective steerco is a bit trickier.  You need to select members that can lead each of the objective workstreams.  This requires selecting executives that have significant cross-functional span of control, but also a high level of accountability for the achievement of the outcome in question.  In other words, they must both care whether the objective is achieved and have the (practical and political) means to do something about it. 

Remember to set your steerco up in time to get their input on the diligence process and kickoff materials.  And don’t forget to require the steerco members to complete the NDA process.  Really!  Most of the blabbing I overhear in airports comes from very high up the ladder, and everyone benefits from a reminder to keep things buttoned up.  Once the NDAs are signed, walk the steerco through the problem statement, deal rationale, and TOM assumptions to ground them in the basics of the deal and get their feedback.

Tools O’ The Trade

Your attorneys will likely provide the due diligence data room.  This will quickly become a morass of documents, all organized in a structure that only lawyers and aliens from the planet Nebu can understand (in reality the data room structure is often tied in some way to the numbering system of the due diligence requests and/or questionnaires).  As such, taking time to agree with your attorneys on a structure and numbering system for these documents can prevent confusion and save a great deal of time that would otherwise be wasted searching.
You will want your own repository for non-confidential documents such as kickoff decks, status reports, training materials, etc.  Take the time now to set up the tool of your choice, i.e. SharePoint, Box, Dropbox, or other.  This will make coordination and communication during diligence easier and carries over nicely to integration should the program move forward.  Loading any existing deliverables you have accumulated to date, i.e. documentation of deal rationale and TOM assumptions, is a good idea.

Recap

​Take the time to do some basic program setup, including establishing tools and governance, prior to commencing diligence.  This will improve coordination and yield better diligence results.  Make sure to design a robust onboarding and NDA process, and to have platforms in place whereby resources can obtain and share materials.