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Due Diligence During the M&A Process – Part 1

Background
Due Diligence is the process of investigating the feasibility of a purchase, a product or investment. It is the responsibility of both the buyer and the seller to perform due diligence to make sure that what is paid for is worth the price, and if it is the seller, to verify that the offered price is fair. As it will be learned from this video there are a variety of instances where due diligence may be applied.
• As a manufacturer you perform due diligence to be certain the product meets all the safety precautions.
• A business investor carryout due diligence to ensure that a sound business decision has been made, and this include investigating the history of the key players of the company.
• A consumer carryout due diligence to find if the product offered suits its needs and is offered at a fair price.
• Property buyers carryout due diligence to make certain the buildings are sound and in good repair, and that there are no holds on the real estate.

Objectives
After listening to this video by George P. Shanas and Marcus H. Klebe you should be able to:
• Define what is meant by Due Diligence during Mergers and Acquisitions process.
• Understand why due diligence is important for both the Buyer and the Seller.
• Understand why it is necessary to present the true picture of the business situation to the buyer.

Link to the video: http://www.youtube.com/watch?v=AKKvXhPiVdw

Discussion
In this video George P. Shenas owner of George P. Shenas Incorporated interviews Marcus H. Klebe about the importance of due diligence in M&A transactions. According Mr. Klebe, as a buyer you just don’t walk into a car dealership, make a payment and walk to the car you want. As a buyer you compare car dealerships by looking at different models, customer complaints and how different dealerships treat customers to make an informed decision.

As a seller, you have to explain and make all the relevant information about your business available to the buyer. As a potential seller, it is advisable to carryout due diligence in two ways, the first is the speed of concluding the deal which must be done as quickly as possible. It is also important for the buyer to disclose all the facts, both positive and negative, about the business and explain why it is worth the proposed value. The Chief Executive Officer of a company must not view due diligence process as administrative burden but as an opportunity and a valuable tool to put their house in order. Being open about the negative aspects of your business erodes trust in the part of the buyer; you will never have that opportunity to freely explain them to the buyer if you fail to reveal them from the onset.

Summary
Due diligence must be thought of as building trust with the buyer as well as elimination of any room for further negotiations. By creating any room for mistrust it becomes difficult to convince the buyer to pay the projected price. The seller must also keep in mind that not honestly presenting the true picture of the situation of the company to the buyer will prolong the length of the transaction and payment period.

References
Sea, S.S. (2011). What is Due Diligence. Retrieved September 21, 2011 from http://ezinearticles.com/?What-Is-Due-Diligence?&id=5417982
Shenas, G.P. (2009). Due Diligence During the M&A Process - Part 1. Retrieved September 21, 2011 from http://www.youtube.com/watch?v=AKKvXhPiVdw

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