Post on 25-Feb-2021
Conducting Sell-Side Due Diligence
in M&A: Maximizing Deal Value
and Minimizing Closing Delays
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THURSDAY, JUNE 4, 2015
Presenting a live 90-minute webinar with interactive Q&A
Claudine M. Cohen, Principal, CohnReznick Advisory Group, New York
Karen C. Hermann, Partner, Crowell & Moring, Washington, D.C.
Andrew J. Sherman, Partner, Jones Day, Washington, D.C.
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Part 1:
Goals and Benefits of Sell-Side Due
Diligence: An Overview
Andrew J. Sherman Jones Day
51 Louisiana Avenue, N.W.
Washington, DC 20001
202-879-3686
ajsherman@jonesday.com
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Andrew J. Sherman
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Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide.
He is the author of 26 books on business growth, capital formation and the leveraging of intellectual property.
His twenty-second (22rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s
Intellectual Property, (AMACOM) was published in October of 2011. Other recent titles include the best-selling
Mergers and Acquisitions from A to Z, third edition was published by AMACOM in 2010. He is also the author
of the 2nd edition of the Due Diligence Strategies and Tactics, which was published in the Spring of 2010. His
twenty-third book Essays on Governance, was published June of 2012 and in 2013, he was named by NACD as
one of the Top 100 Leaders in Governance. In 2014, he was included in the global IAM 300, recognizing the
world’s thought leaders in managing intangible assets.
He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s
“Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,”
and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local television
broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News
Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and
the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development.
He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at
the University of Maryland for 26 years and at Georgetown University for 17 years in both the business school
and the law school where he teaches courses on business growth strategy.
He has served as General Counsel to the Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune
magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine
named him one of the all-time champions and supporters of entrepreneurship and business growth.
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. 1500343242 7
Current Trends In The
New Era of Due Diligence
©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Current Trends Affecting Due Diligence Best Practices
• Societal expectations of transparency/age of social
media/millenials
• Impact of shareholder activism and accountability of
company leaders/brands for the success/failure of
transactions
• Depth/breadth/scope of due diligence (post-enron,
mortgage crisis, etc.)
• Cost and timetable impact of the new era of diligence
• Volatility of capital markets and geopolitical shifts
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Current Trends Affecting Due Diligence Best Practices (Cont’d)
• FCPA/regulatory enforcement effects on due
diligence
• Data rooms vs. “face-to-face”/on-site diligence
• IP issues (crown jewels analysis, hidden intangibles,
Black Duck, etc.)
• Cyber-security and data privacy laws and
developments
• Cross-border considerations
• Other trends for discussion???
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
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The Art & Science
of Due Diligence
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Legal and Transactional Goals of Due Diligence
• Identify and mitigate risk
• Test the underlying economic premise of the goals of
the transaction
• Prepare for post-closing integration challenges and
tasks
• Gather key information for drafting R&W’s,
covenants, indemnities, etc.
• Identify “unexpected” opportunities
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
What Is “Due Diligence”?
• Due diligence is both an art and a science
• Proper due diligence involves:
Knowing where to look
Knowing what to ask
Knowing what tools to use
Knowing who to ask
Knowing how to test premises/answers
Knowing who should ask
Knowing how to verify
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
What Is “Due Diligence”? (Cont’d)
• The “Art” of Due Diligence:
Understanding how to extract key information from a person or situation
Understanding the objectives of the parties and the underlying transaction
Identifying key hurdles and risks
Identifying why information might be falsified or omitted
Targeting the proper sources for disclosure of information
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
What Is “Due Diligence”? (Cont’d)
• The “Science” of Due Diligence:
Do your homework
Be prepared and well-organized
Be precise in your requests
Be persistent in your quest for the truth
Don’t accept the first answer as the final answer
Trust your gut – “if it’s too good to be true …”
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Due Diligence Best Practices
• Work as a team, but have a clear quarterback/captain
• Designate a primary point of contact for each party to the transaction
• Conduct regular team meetings to compare notes and coordinate carefully
• The more you know, the better questions you can ask
• Be organized – set timetables and deadlines for deliverables
• Use industry experts early and often
• Use technological tools available to you (search engines, data rooms, etc.)
• Develop penalties/consequences/remedies for non-compliance
• Understand why a party may be trying to hide key facts or circumstances
• Question everything – BE INQUISITIVE!
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
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Goals and Benefits of
Sell-Side Due Diligence
©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Overview of the Seller’s Process
• Pre-transactional “mock” due diligence (Identify potential
“turn-off’s” and risks that will defer a potential buyer
and/or adversely affect valuation/ price/deal terms)
• What gets fixed? At what cost? When?
• Financial statement “re-casts” (understanding the actual
performance of the business on a “normalized” basis)
• Preparation of effective and accurate offering
memorandum and management presentations
• Population of the data room (phasing of process; key
participants and who will know what when?)
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Overview of the Seller’s Process (Cont’d)
• Buyer’s counsel are trained to look for problems and
then push hard for document protections/adjustment
to terms – DON’T GIVE THEM ANY MORE
AMMUNITION THAN THEY ALREADY HAVE!
• Study potential post-closing challenges, cost/impact
on buyer, etc.
• Look at internal controls/compliance practices/
accounting systems, etc. (how will a public/large
buyer perceive from an FCPA/Sarbox/etc.
perspective)?
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
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Due Diligence Is A
Two Way Street
©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Why do sellers need to conduct “reverse due diligence” on buyers?
• Selecting the right buyer
• Track record for closing deals
• Deal terms (seller financing/creditworthiness, stock
payment/business plan issues, earn-out/
trustworthiness, deferred payments/accounting
integrity
• Perceptions of key customers, channel partners,
supplies, etc.
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Why do sellers need to conduct “reverse due diligence” on buyers? (Cont’d)
• Challenges in removing/replacing seller on loan
guaranty, lease guaranty, related issues
• Channel conflict and OCI issues
• Cultural and compensation impact on employees/
ecosystem
• Post-closing dispute patterns and likelihood of
litigation
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©Copyright 2015. Andrew J. Sherman. All Rights Reserved. ©Copyright 2015. Andrew J. Sherman. All Rights Reserved.
Summary of Sell-Side Due Diligence Tips
• Be well-organized
• Be cooperative
• Be responsive
• Be strategic (what gets shared when to whom?)
• Don’t be defensive
• Think 3 chess moves ahead/”impact” analysis
• Have a key point person for coordination
• Momentum is key
• Know “when to say when” (due diligence disputes are often a precursor to larger problems)
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C O N D U C T I N G S E L L - S I D E D U E
D I L I G E N C E I N M & A
TA B L E O F C O N T E N T S
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About CohnReznick 25
Transactional Advisory Services 26
Overview of Sell-Side Services 27
Benefits of Sell-Side Services 28
Gathering data room documents 30
Documenting problems 31
Contacts 32
Page
C O H N R E Z N I C K
B Y T H E N U M B E R S
One of the top accounting, tax and advisory firms in the U.S. We offer
solutions to the most complex and challenging business issues facing both
public and private, middle market companies
Blends the deep resources and technical acumen of a large accounting
firm with a hands-on, entrepreneurial service approach that growing
organizations require
Serves clients in numerous industries
International reach via Nexia member firms in more than
100 countries
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10th LARGEST ACCOUNTING
FIRM
2500+ EMPLOYEES
280+ PARTNERS
26 OFFICES
$500 + MILLION IN ANNUAL
REVENUES
T R A N S A C T I O N A L A D V I S O R Y
S E R V I C E S
26
Serving a broad spectrum of industries, the Transactional
Advisory Service teams are comprised of industry and
subject matter experts who work collaboratively with
other CohnReznick Advisory Group specialty areas as well
as our industry verticals. Our services are designed to (i)
identify value-critical issues that could have adverse
consequences on your transaction, and (ii) provide
buyers and sellers with the intelligence to make informed
risk/reward decisions.
Transactional Advisory Services
Our Transactional Advisory Services
professionals deliver a full range of
services focused on all stages of the
transaction process.
Strategic Advisory Strategic Alternatives
Financing Strategies
M&A Strategies
Recapitalizations
Sell-Side Due Diligence
Financial Due Diligence
Tax Due Diligence
Information Technology and
Operational Due Diligence
Acquisition Integration
Purchase Price Dispute Resolution
With proven experience in complex
situations, unsurpassed technical
guidance, and results-driven strategy,
we deliver unparalleled insight to
maximize value.
O V E R V I E W O F S E L L - S I D E
S E R V I C E S
27
What is Seller Diligence?
Diligence is conducted from a buyers perspective with the goal of increasing buyer
confidence
Sell-side due diligence provides realistic expectations of normalized EBITDA, adds
credibility to data provided to the buyer, reduces the element of surprise during the
sales process and shorten the buyers due diligence process.
Deliverable is a function of the agreed upon scope used as part of the sale process
that has been vetted with seller management for factual accuracy and content
Typically performed as part of an auction, managed sale process, refinancing, etc.
Is paid for by the seller but intended to reduce overall diligence costs by getting
ahead and in front of issues to decrease the chance of unnecessary delays in the
sales process.
B E N E F I T S O F S E L L - S I D E
S E R V I C E S
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Focuses on issues relevant to even the most scrutinizing purchaser.
Provides in-depth analysis on the financial condition of the seller, and aid sellers in
securing a higher price for their business by adding more control over the sale
process and reducing the sales cycle.
Identifies issues giving the seller an opportunity to fully explain circumstances that
could be perceived as flaws to the prospective buyers.
Determines the true value of their business, assist with purchase agreement structure,
address carve-out and transitional concerns and coordinate data room
composition.
Evaluation of the integrity and sustainability of historical results .
Tax due diligence & structuring, among others.
B E N E F I T S O F S E L L - S I D E
S E R V I C E S
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Increase the quality of bids and should help to maximize value of the sale.
Reducing potential buyer diligence, there is less of a need to provide exclusivity to
any one buyer.
Set the scope such that buyer focus should be limited to key areas.
Seller will have the opportunity to comment on and screen the deliverable,
providing the opportunity to address issues proactively.
Less time will be required of seller management as the buyers perspective that we
bring will pre-empt much of potential buyer inquiry.
Allows the seller to have greater knowledge and control over the information
presented.
G AT H E R I N G D ATA R O O M
D O C U M E N T S
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Information request list details financial data and documents available.
Organize and present documents in a systematic manner.
Focuses on information relevant to potential buyers.
Providing financial data and schedules.
D O C U M E N T I N G P R O B L E M S
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Identify opportunities for the buyer to create & maximize value
Understand the Company’s strategy for procuring, producing, distributing,
marketing, and selling
Assessment of the quality of management & other personnel
Quality of Earnings, quality of working capital, net debt, commitments &
contingencies, cash flow, seasonality, potential exposures (e.g., off balance sheet
liabilities, etc.)
Tax footprint – current structure and whether there are opportunities to capture
value
Analyze whether growth, as projected by Management, appears reasonable
based upon historical performance
CohnReznick LLP
Claudine Cohen, Principal
646-625-5717
Claudine.Cohen@cohnreznick.com
www.CohnReznick.com
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C O N TA C T
Conducting Sell-Side
Due Diligence in M&A
Karen C. Hermann
Goals of the Management Presentation
• Provide additional information to the Buyer to potentially increase the initial offered price.
• Allow the management team to be introduced to the Buyer and to “sell” their vision for the future.
• Obtain information from the Buyer to focus down-selection of potential Buyers.
34
Components of a Management Presentation
• Overview of the management team and the target
• Significant customers / contracts
• Historical financial information
• Pipeline and growth strategy
• Market differentiators
• Threats and challenges
35
Legal Considerations
• While typically drafted by the bankers, the legal team should review for: – Antitrust concerns – Competitively-sensitive information – Inaccurate statements – Guarantees or glaring omissions
• Include appropriate disclaimers. • Limit distribution (and attendance) to persons or
entities covered by an NDA. • Confirm there is strategic alignment among
stakeholders and management team.
36
Confidentiality and Disclosure Considerations • Inevitable that confidential information will be
disclosed: – Nonpublic business information, such as customer and
employee lists. – Information about critical intellectual property. – Competitively-sensitive information, such as pricing, key
competitors or market position.
• The fact that an M&A process is being considered is itself confidential information: – In some cases, an NDA is signed with the investment bank
before the name of the target entity is revealed.
• Use reputable data sites and vendors.
37
Non-Disclosure Agreements
• Critical that the NDA be tailored to the transaction and to the parties.
• Carefully define “Confidential Information” and exceptions.
• Limit further disclosure (to lending sources, for example) or specifically address obligations.
• Buyer may request that the Seller/Target also sign the NDA to prohibit the Seller/Target from disclosing that the Buyer is engaged in the process or any of the terms of the Buyer’s offer.
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Internal Policies and Procedures
• The internal flow of information should also be carefully managed.
• Disclosure should be limited to the “deal team” and deal team members should understand the confidentiality requirements.
• Consider setting up a password protected or separate document repository.
• Keep the deal team informed on who is or is not on the deal team.
• Hold management presentations and negotiation meetings off-site.
• Limit site tours to after hours. 39
Timing and Limits on Disclosures
• Stage the disclosures: – Do not disclose competitively-sensitive or highly-
confidential information in the initial stages of an auction process:
• Redact customer or supplier names. • Aggregate information where possible. • Disclose employee lists by employee ID only.
– There may be a need to limit some particularly sensitive information until days before or even just after signing.
• Assume that the deal will not go forward, or that this potential buyer will not be the ultimate buyer.
• Consider antitrust implications of disclosures.
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Karen C. Hermann Crowell & Moring LLP
1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004 khermann@crowell.com
(202) 624-2722
www.crowell.com
Crowell & Moring LLP is an international law firm with more than 500 lawyers representing clients in litigation, regulatory, and transactional matters. The firm is internationally recognized for its representation of Fortune
500 companies, emerging companies, and their investors as well as its ongoing commitment to pro bono service, diversity, value-based billing, and legal project management. The firm has offices in Washington, D.C.,
New York, San Francisco, Los Angeles, Orange County, Anchorage, London, and Brussels.
Contact Information
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