Whether a company is seeking private financing, participating in an acquisition or undertaking a public offering process, the other parties to the transaction will conduct a investigation of the company in varying degrees. Due diligence is the process of independently identifying and verifying information that either must be disclosed in offering or acquisition documents or is otherwise relevant to an understanding of the company’s business. Due diligence may also include an evaluation of the company’s operations, management, finances, , legal matters and prospects, and, in an IPO process, an assessment of the company’s readiness and ability to function as a public company. A due diligence investigation will vary in scope and comprehensiveness depending on the transaction in question — a follow-on investment by existing investors may require little, if any, due diligence, while the due diligence process in an acquisition or public offering is aimed at leaving no stone unturned.
Organization and advance work to remediate known problems before formal due diligence commences are the key elements in ensuring a smooth due diligence process. A first step is to allocate internal responsibility for overseeing the due diligence process. Companies typically designate one employee to coordinate its responses to information requests. This person should be very familiar with the company, have the internal authority and access to corporate resources to assure prompt action and be sophisticated enough to understand and prioritize requests.
Next, documents need to be gathered, organized and made available to the other parties, often through an online “virtual” data room. Company counsel can provide a good indication of what types of documents companies should have ready for the particular type of due diligence process. By keeping at hand in advance key documents that are likely to be relevant in any process, such as organizational documents, material contracts, intellectual property materials and regulatory compliance documents, the amount of work and distraction inherent in the due diligence process can be minimized. An organized due diligence process also builds the confidence of the other transaction participants that the company is operating successfully and that it is on top of its business.
Advanced corporate housekeeping can facilitate the due diligence process. Problems that are unearthed early on can be remediated (or a plan for remediation put into place) in advance of the commencement of the process. Ideally, a company should never be surprised by its own responses to due diligence inquiries.
The due diligence process is intrusive, time-consuming and tiresome, but can also be instructive and useful. As the other transaction participants inquire into the company’s business, finances, contracts, accounting, human resources matters and regulatory position, the company can identify its strengths and weaknesses and develop strategies to take advantage of the former and mitigate the latter, while at the same time increasing its protection against and minimizing the potential liabilities that are inherent in these significant corporate events.