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Tips and Answers
to Your Questions
Due Diligence
What is due diligence?
Due diligence is the process by which confidential legal and financial
information is exchanged, reviewed and appraised by the parties before
a merger (or other legally binding) agreement is finalized. The essence
of the due diligence process is an effort to make everyone on the negotiation
committee, and by extension everyone on the board, as aware as a prudent
board member can be of any liabilities the other party may bring to
the table. The desire is to create a "no surprises" situation
so that when, say, six months after a merger’s effective date,
a balloon payment on a loan must be met, no one can claim that the
matter was hidden.
Often attorneys or consultants undertake the due diligence on behalf
of, and report their findings to, the negotiations committee. We recommend
that the committee undertake the process itself, relying on outside
experts as necessary. In this way the negotiators become intimately
familiar with the other party’s operation. They can then provide
more focused questions for any consultant and/or attorneys, saving
time and money.
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