This is part 1 of the five-part series “Compliance, Diligence, and M&A” with Tom Fox and the FCPA Compliance Report. During the series, Tom was joined by K2 Integrity experts Hannah Coleman and Tom Pannell for a discussion on due diligence’s role in the M&A process, and how it can create a more successful environment for integration.
Due diligence is the process of getting smart about a person or an entity with whom you are entering into business. There are a variety of different types of due diligence: financial; operational; IT, compliance, and ethics; and reputational. Broadly, a due diligence investigation focuses on uncovering issues in the background of a company or an individual that could be damaging to the subject of the diligence and by extension to the acquirer. Due diligence is usually performed in the context of a business transaction, such as a potential M&A or an investment, and in the context of a board appointment or an executive hire of someone who will be a decision maker or a highly public or visible member of a company’s leadership team.
The first step in conducting such due diligence is to determine what risks there may be across a wide variety of factors. By determining that risk, you move toward the appropriate level of due diligence. However, the level of due diligence can change, so it needs to be a flexible process. For clients, it is recommended that they take some time to think about the kinds of risks that are involved in a particular transaction or a specific hiring to help inform the level of diligence performed. Of course, if something comes up in the diligence investigation, it would be evaluated in an updated context.
The independence of the investigator is also key. A client may believe because they have known someone for 10 or 20 years, they know all there is to know about them and their background, but that may not be true.
Another key to a successful investigation is remembering that the due diligence investigator is there to provide facts, not to make the decision for the client or to push forward one solution rather than the other. Investigators do not tell deal makers what to do. They are fact finders and are hired to serve as advisors with the intent of presenting the best information to help the decision maker make an informed decision.
When it comes to successfully working with an investigator, it is important for clients to clearly communicate their purposes and priorities and to share as much background and context as possible in order to help the investigative team be smart in their research. Ultimately, this ensures that the report produced will focus on sharing information that affects the issues the client considers significant, as opposed to highlighting normal, course-of-business activities. For example, there are certain industries where a high volume of certain types of litigation is very normal and not really an issue of concern. It is helpful to know that going in so resources are not unnecessarily focused on details that might be ultimately unimportant, thus making the best use of the client’s time and money.
The end result changes depending on the assignment basis and the client. There are cases where deep dive due diligence is performed that will generate a long, written report summarizing all the findings. Such reports usually begin with an executive summary and run 20 or 30 pages or longer. It can also be a shorter form report that only reports on adverse findings, or shares the results of a much more targeted search. It all depends on what the client wants and how they want the information presented.
Join us for Part 2, where we discuss concerns in deal making.
