Due diligence is sometimes referred to as a full proctological exam and rightfully so. It is more than a buyer’s attempt to confirm the stated valuation given by the seller to the buyer. It is much more than that. In very broad terms it provides a means for the buyer to get comfortable with operations, finance and marketing such that the buyer is able to understand the business from inside and out. There are countless due diligence checklists available online, which can certainly be helpful in knowing which questions to ask and how to avoid missing items that may come back to burn a buyer later. However, one question that rings in many ears is: “how long should due diligence take for a merger or acquisition?”
That depends, are you the business seller or company buyer? Buyers naturally want due diligence to last as long as humanly possibly, while any seller would like rapid due diligence. The arguments on both sides are valid. Fast due diligence for sellers can be used as a means to obfuscate real business issues from the eyes of the buyer. On the other hand, slow and protracted due diligence on the part of the buyer can be used to find more skeletons and ultimately put the screws on company’s valuation.
Due diligence should be as long as necessary for the buyer to obtain all the requested items. Any elongation of the process is usually unnecessarily disingenuous to the seller. Typical common knowledge would state that “time kills all deals, even the good ones.” Because time is no one’s ally in deal-making, sellers should be aware of the length their due diligence should and could take to get a deal done.
From personal experience, any due diligence period past 90 days is a recipe for disaster. As my parents used to say, “nothing good happens after midnight,” so too in due diligence, “nothing good happens after 90 days.” Whether its attempted deal re-trading or the inevitable deal breakup because of something found (or not found) in the virtual data room, the length of the due diligence does matter, especially once you go exclusive with a given buyer. Exclusivity precludes the seller from any further talks while the buyer has unfettered access to all the most personal and intimate details on the company.
Due diligence timelines that are reasonable are especially important for deals where a buyer may have won the auction and is looking to potentially pay a premium. Many bidders may submit the “best and final offer” on a business only to re-negotiate in due diligence once they inevitably find something that may have bloated the numbers or concealed some internal transgression. In today’s competitive private equity world where the best deals are often bid-up, I have seen buyers that live (and frequently die–especially in reputation) with a slash-and-burn deal mentality in competitive bidding situations. Truncated due diligence is never going to be acceptable by a buyer, but when a seller is seeking a premium, you can most certainly expect to have a more exhaustive (and likely stressful) due diligence period.
A note to sellers: do not be the due diligence bottleneck. If the due diligence is extended past 90 days and it’s your fault, then that is another matter. It is best to work with your investment banker to ensure you’re covering all the requested items on your due diligence request list to ensure you are not the reason the deal has not closed. It is best to insist on due diligence of 90 days or less and then push your internal team to deliver on 100% of the requested items within the first couple of weeks, where possible. This will give buyers no excuse when it comes to delaying the close based on something you may have failed to do. I fully understand that smaller companies often do not have all the data requested to them from sophisticated buyers, but sellers should prepare–as best as possible for impending due diligence requests which truly may feel like a visit to the proctologist.