First, let's define "manage". I use this term here to describe the process
- Setting up and owning the data room
- Guiding the buyer as to how to organize and consolidate his requests
- Guiding the seller as to what needs to be put in the Data Room and in what format
- Act as a middleman during the entire process
With that definition, it is clear that the Seller's Investment Banker (IB) is responsible for managing the Due Diligence Process. Keep in mind that the seller has probably never been thought this rigorous, complex and time-consuming process. No matter how much warning his IB may have given before this stage is reached, he will not understand the work that will be required. Some pointers that will help the seller get through this include:
- Manage the buyer's due diligence team through the buyer. It is the buyer's job to control his vendors. He should consolidate the requests lists from them into one list to avoid duplications. This may limit the most painful part of the process for the seller.
- Once this list is received, the IB should walk the seller (and his team) through the list so he can respond appropriately, immediately indicate which are N/A, which are best answered with "None" and get those requests off of his plate. Then the IB can call the buyer with questions on his list.
- Next, I suggest the IB take the first step to fill out the request list response by indicating the items that are already in the data room and where they are.
- The data room should be organized to correspond to the numbered list provided by the buyer. There should be a spreadsheet with that numbering system. Each response should be named and numbered to match the list and the list be kept up to date through the process.
- Now the seller's team can focus on providing the balance of the information.
- As the process progresses, a separate, clear list of all outstanding items should be reviewed on conference calls on a timely basis. You will often have to tell the buyer and his vendors numerous times something like "As it states on your spreadsheet, that item is in the data room folder X". After some time, they will start to realize they need to look before asking.
As your seller responds to the initial questions, there will undoubtedly be more questions about the answers. That is just part of the process. However, make sure the follow up questions become part of the controlling spreadsheet. Also, if some requested information will be very difficult or very time consuming to assemble, tell the buyer and ask if it is critical to the process. Often, there are other data sets that may answer the underlying questions, or the data simply isn't that important.
This system and organization will enhance the efficiency and reduce the headache for all. This will also greatly reduce the time element, thus decreasing the "Time kills all deals" factor.
Some Caveats include:
- The IB should not be the party responsible for providing information to the buyer. That sets up liability and opens the door for the IB to be the scapegoat for contention.
- Try very hard to get the seller to include as much of his team in this process as he can. All to often, the seller thinks he can do it all. He can't.
- Don't let the seller's memory (or lack thereof) replace facts. The buyer will want documents to validate opinions, memories and suppositions. Remember that the buyer's team will include accountants, attorneys, insurance analysts and other documentation oriented people.
Due Diligence is never easy, fun, interesting, pleasant or thrilling. It is arduous but necessary. I hope some of the comments above help your Due Diligence process a little easier. Remember the end of the Diligence storm is the true Rainbow of an exciting closing for all.
Posted by: Terry Fick