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Anatomy of a Deal: Streamlining Due Diligence

Panelists at ACG’s 2022 InterGrowth conference discuss how to prepare for roadblocks

Anatomy of a Deal: Streamlining Due Diligence

Due diligence is a complex process that leads down different paths. Understanding the key stages of due diligence and preparing for possible roadblocks can help make the process run smoothly and prevent killing a deal.

At ACG’s InterGrowth panel discussion, “Anatomy of a Deal: A Middle Market Deal Case Study,” experts talked about due diligence and how to make the process as easy as possible.

Pre-Deal Stage

The pre-deal stage is about planning and aligning interests. If diligence becomes a stumbling block, because of snags like disorganized emails or data, friction is created and momentum slows down, said Asim Grabowski-Shaikh, partner at Cleveland-based law firm BakerHostetler.

He suggested that sellers plan ahead by collecting and organizing the diligence that they think people are going to ask for, and if sellers need a banker, they should have them engaged. It’s important to do all of this before the process starts, he said.

“If you do that, you have planned properly, and you are aligning to execute on an efficient transaction,” Grabowski-Shaikh said.

Things are going to come up with diligence, and you need to know who you are dealing with to deal with those issues when they come up.

Asim Grabowski-Shaikh

BakerHostetler

Conducting Diligence

In the next stage, it’s time to conduct diligence to align interests. If bankers are involved, these deals run more smoothly and efficiently. But with many middle-market deals, bankers are not usually part of the deal, so communication is critical and must be done early and often.

Related content: Six Essentials for Driving a Successful Merger & Acquisition Integration

“Diligence is one of those critical areas within a deal process on both sides,” said Jennifer Lee, partner at Princeton, New Jersey-based private equity firm Edison Partners. “Bankers don’t spend a lot of time in the middle market level, but we are seeing more and more bankers involved.”

Grabowski-Shaikh said in respect to buyers, it’s essential they know what they are getting, and diligence is the way to confirm that. If it can’t be confirmed, buyers need to figure out what they are going to do regarding allocating risk.

When diligence is going on, Grabowski-Shaikh said he always wants to know what’s the best alternative if a deal blows up in what he calls the Plan B discussion with clients.

“These types of discussions help set the stage. There is never going to be a perfect deal, and you are never going to get exactly what you asked for,” Grabowski-Shaikh said. “You are never going to get a deal where the seller is squeaky-clean. Things are going to come up with diligence, and you need to know who you are dealing with to deal with those issues when they come up.”

Uh-Oh Stage

Grabowski-Shaikh calls the last due diligence stage the uh-oh stage. If the deal wasn’t planned properly, it can kill the deal. Sometimes there are showstoppers that prevent the deal from moving forward, but many times you can find a middle ground, he said.

Let’s be honest, the biggest thing that happens in most deals – what screws it all up – is people.

Michael Vacarrella

Wipfli

While many people try to prepare for every possible dealbreakers, it’s not reasonable to believe problems won’t arise even if you think you’ve done everything right, said Michael Vacarrella, partner, private equity and transaction advisory services at Milwaukee-based consulting firm, Wipfli. That’s because you can’t always account for what people will do, he said.

“Let’s be honest, the biggest thing that happens in most deals – what screws it all up – is people,” Vacarrella said.

Related content: Post-Transaction Integration: It’s All About the People