Many due diligence
red flags can be mitigated, but if the risk profile of a third party is too high and cannot be mitigated, companies must be ready to either reject or terminate the third party.
Yet we have found no convergence on what the practice of due diligence
is and how this process of making sense of an investment target in a moving context can best be managed.
Sellers will believe that there is a greater certainty of closure if a buyer has taken the time to engage in quality due diligence
and is selective about the issues of importance in the transaction.
In the FCPA context, the extent of due diligence
may vary with whether the target does business in corrupt countries, whether the target's business involves interaction with foreign governments, and whether the target employs third parties.
The Rule 144A due diligence
process can be divided into two parts, although these are closely related: documentary, or legal, due diligence
, and "management" due diligence
Since the margin of error for survival in M&As is thin - and getting thinner - due diligence
should start even before negotiations are underway.
The scope of a due diligence
analysis with vary according to management experience, timing, size and complexity of the deal (see the exhibit on page 73 for a general rundown.
Paragon's general and administrative expenses increased by $14,000 for the second quarter of 2005 to $239,000, and for the six months of 2005, these expenses increased by $233,000 to $697,000 for due diligence
undertaken mostly during the first quarter of 2005 on a large potential acquisition.
If the acquirer carries out traditional due diligence
and focuses primarily on checking sanitized, vetted reports and interviewing key employees, it may completely overlook the candid, liability-laden statements that are crucial to understanding the target, warts and all.