The average Due Diligence Memorandum that a law firm submits to its Acquirer client toward the end of the due diligence process reads like an encyclopedia. It covers all the bases, thoroughly, but is not likely to focus appropriately on the key issues in any particular deal.
I have developed a practice of first asking the Acquirer’s managers involved in an M&A deal what they expect to obtain from the deal and what risks they know that they run, and then tailoring my initial due diligence investigation and report to their answers. This produces an early due diligence report which is much less inclusive than the final report, but of great practical use as the deal goes forward.
I include here an example initial report for an Acquirer, based on my first two-day due diligence visit to a Target.
If the Acquirer then wants more global coverage of the liabilities and risks in the deal, I can follow up with the typical all-inclusive Due Diligence Memorandum. In some cases, the Acquirer doesn’t need this substantial and time-consuming extra work, because the initial focused summary is enough by itself to help the managers decide on whether or not to pursue the deal.
The advantage of this two-step process for the Acquirer is easy to see: when the first step results in the Acquirer deciding not to pursue the deal, the cost of the due diligence review is much reduced. This happened in the case of the example initial due diligence report, with its numerous red flags for the Acquirer.