Acquiring a business is a complex transaction that involves a lot of moving parts. Due diligence is a critical step in the M&A process that involves a comprehensive review of the target company's financial, legal, and operational information. Due diligence is important because it helps the buyer assess the risks and opportunities associated with the transaction, and make an informed decision about whether to move forward with the deal. However, due diligence can also be a time-consuming and costly process, and in some cases, can lead to re-trading.
Re-trading is a term used to describe a situation where the buyer attempts to renegotiate the terms of the deal after due diligence has been completed. Re-trading typically occurs when the buyer uncovers new information during due diligence that was not disclosed by the seller during the negotiation phase. This new information can include negative financial or legal issues, or material changes to the target company's operations or market conditions. Re-trading can be a contentious issue, as the seller may feel that the buyer is trying to take advantage of the situation to lower the purchase price.
To avoid re-trading, it's important to understand the due diligence process and how it can impact the transaction. The due diligence process typically involves four stages:
Planning and Preparation: In this stage, the buyer and seller agree on the scope and timeline of the due diligence process. The buyer will typically provide a due diligence checklist to the seller, which outlines the information and documents that need to be reviewed.
Information Gathering: In this stage, the buyer reviews the target company's financial, legal, and operational information. This can include financial statements, contracts, customer and supplier lists, legal filings, and other relevant documents. The buyer may also conduct site visits and interviews with key personnel.
Analysis and Evaluation: In this stage, the buyer analyzes the information gathered during the previous stage and evaluates the risks and opportunities associated with the transaction. This can include financial modeling, market analysis, and legal review.
Reporting and Recommendations: In this stage, the buyer prepares a due diligence report that summarizes the findings and makes recommendations to the decision maker (usually an investment committee or company CEO/owner) about whether to move forward with the transaction. The report may also identify areas where additional information or clarification is needed.
To avoid re-trading, it's important for both the buyer and seller to be transparent and upfront about any issues or concerns that may impact the transaction. The seller should provide accurate and complete information during the due diligence process, and the buyer should ask for clarification or additional information if needed. It must be stressed that a buyer should perform thorough pre-LOI diligence, to ensure the offer made to the seller is fair and will withstand the post-LOI diligence phase. This includes talking with investors and lenders, if applicable, to validate capital availability for the acquisition at the proposed structure. If the buyer uncovers new information during due diligence that was not disclosed by the seller, the buyer should communicate this information to the seller as soon as possible and try to work together to find a mutually acceptable solution.
In conclusion, due diligence is a critical step in the M&A process that can help the buyer assess the risks and opportunities associated with the transaction. However, due diligence can also lead to re-trading if new information is uncovered that was not disclosed by the seller. To avoid re-trading, it's important for both the buyer and seller to be transparent and upfront about any issues or concerns that may impact the transaction, and to work together to find a mutually acceptable solution.
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