creating a due diligence framework
Post on 20-Oct-2014
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This presentation gives an in-depth look at the comprehensive due diligence process. It covers the framework for due diligence, its purpose, and types. This presentation is incrediably valuable for anyone doing or looking to do transactional work.TRANSCRIPT
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Creating a due diligence framework
• What is due diligence?
• What is a due diligence framework?
• Creating a due diligence framework
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What is due diligence?
• The investigation into the business, legal and financial affairs of an entity (the “target”)
• This “target” investigation occurs in connection with a wide variety of transactions, including financings and acquisitions of shares or assets
• Due diligence is essentially a detailed risk assessment
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Functional types of due diligence
• Market/commercial due diligence
• Legal due diligence
• Financial due diligence
• Accounting due diligence
• Operational due diligence
• Environmental due diligence
• Tax due diligence
• Regulatory due diligence
• Legal element to all types of due diligence
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Different purposes for due diligence
• some due diligence is “target” focused, this type of investigation attempts to address the risks and or issues regarding what is being acquired
– e.g. existence of loan agreement
• transactional due diligence addresses the risks and or issues concerned with getting the deal done
– e.g. loan agreement requires consent of bank for transaction
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Why due diligence?
• Due diligence investigation plays an integral role in any business deal for counsel and client
• Time and cost constraints will often be important factors for clients and counsel
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Due diligence expectations
• Time and cost constraints will often be important factors for clients and counsel
• It is important to establish reasons for the parts of the due diligence process at the outset
• Denote specific expectations and processes to be carried out, and specific reasons why certain processes and searches will not be carried out
• These due diligence expectations and processes should be set out in writing for both counsel and client and should be re‐assessed as new information is learned and evaluated throughout the process
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What is a due diligence framework?
• A due diligence framework proposes a structured approach to due diligence investigations which attributes clear deadlines and informational objectives
• A due diligence framework process apportions responsibility to different people and or groups who work as a collective team to pool the information from the related due diligence investigations
• A due diligence framework carefully sets out what the necessary steps to the due diligence work
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What is a due diligence framework?
Here is an example of a suggested due diligence framework for biotech companies interacting with large pharmaceutical companies. It is basic and relevant to the coordination of any due diligence work
1. Knowing what you "need" to know
2. Assembling the due diligence team
3. Preparing the “target” for the diligence event
4. Managing interactions between firms
5. Using the collected information to create value in both firms
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What is a due diligence framework?
1. Knowing what you "need" to know
• be aware of the pertinent types of due diligence to the particular transaction
• time is an important factor
• the best due diligence work is well focused and efficiently allocated
• familiarity with the type of transaction, special knowledge of the industry, or extensive experience with the type of due diligence to be carried out can also be useful in planning what information ‘needs’ to be known
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What is a due diligence framework?
• What you ‘need’ to know regarding a particular transaction or target will likely change as the investigation continues but it is important to organize these new goals with the overall established objectives of the investigation
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What is a due diligence framework?
2. Assembling the due diligence team
• The due diligence team is important to the transaction because the team will be directing the strategic analysis of the target or transaction, they may also be interacting with the ‘target’ which is an opportunity to create a more positive relationship
• Industry knowledge, experience carrying out due diligence investigations, and an awareness of roles, responsibilities and deadlines for the due diligence work are all important factors to consider when choosing the due diligence team members
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What is a due diligence framework?
The due diligence team will also need to search for information in a matter sensitive to the particular transaction
– e. g. certain employees of Company A may not know that assets are being sold, these employees might react negatively to the transaction (Company A has been courting with Company B). If the employees find out in the preliminary stages of A and B’s deal, this could frustrate the continuations of due diligence process and jeopardize the deal.
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What is a due diligence framework?
3. Preparing the “target” for the diligence event
• Deciding with the “target” what data is needed for assessment, how it will be collected and for what purposes, who will have access to it, and where it will be stored
• Denoting these specifications at the outset helps the due diligence process run smoothly
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What is a due diligence framework?
4. Managing interactions between firms
• “target” focused due diligence and transaction focused due diligence investigations occur at very sensitive periods and often involve sensitive and confidential information
• A need to balance between sharing proprietary information and the knowledge that the deal may not occur
• Important to clearly define of roles and responsibilities of staff, actions for each stage of the process and information upload goals for a data room
• Must have clear understanding of the management process of the data room
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What is a due diligence framework?
• Must have clear plan in place to manage the release of information in stages of required knowledge and advancing stages of negotiation
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What is a due diligence framework?
5. Using the collected information to create value in both firms• Information gleaned from the due diligence investigation can
be valuable to both parties because the information and issues found can be addressed prior to a deal, and/or included and indemnified in the closing agreements
• Due diligence can lead to less reliance on Representations and warranties and a clearer idea of
1) The general state of the business;2) The way the business has been run in the past;3) Whether the business has been operated according to industry
standards or in a unique fashion because of certain factors, rights or assets that the purchaser may or may not acquire;
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What is a due diligence framework?
4) Actual and contingent liabilities;
5) third‐party interests.
• Sometimes due diligence searches can turn up unanticipated information which indicate that the transaction should not go through for a balance of reasons, walking away from a bad deal before sharing confidential information is a luxury for businesses who have created a comprehensive due diligence framework that shares sensitive information as it is needed for the due diligence investigation
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What is a due diligence framework?
Continuous re-evaluationuntil deadline or sufficient evaluation completed
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What is a due diligence framework?
• The information sought from the due diligence framework is also constantly re‐evaluated to determine further investigation into certain issues if it is warranted
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Miscellaneous Matters
• Confidentiality agreements
• Proprietary data
• Professional obligations to disclose
• Overlapping agreements
• Technical matters need experts
• Access to key people
• Material undisclosed information
• Cultural differences
• Fraudulent activities
Brian E. Abrahambrian.abraham@fmc‐law.com
+1 604 443 7134LinkedIn
The preceding presentation contains examples of the kinds of issues companies dealing with due diligence could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.