When a deal process is begun, the initial focus is on identifying good potential partners and getting them engaged in preliminary discussions. As one or more potential partners advance beyond these early discussions, the process moves into the critical due diligence phase. While the fact that a partner’s interest is serious enough to engage scientific, legal, strategic and other resources to investigate an opportunity is a great step forward, this is also a key point where deal discussions can fail. Proper execution at this stage is critically important to optimize the chances of success. Some key success factors for managing due diligence include:
- Clear and open communication: Due diligence discussions usually involve the coordination of a lot of moving parts. Since a large volume of complicated information needs to be exchanged, often under time constraints, clear communication is a key success factor. Each diligence call or meeting should be guided by a set of key questions that is shared in advance. This allows an efficient use of time and ensures that the potential partner’s most important questions are answered.
- A well-organized data room: Although virtual data room software can be somewhat costly, having a repository where partners can be granted controlled access to well-organized information is an important way to communicate during diligence. Having a clearly organized data room allows partners to quickly find the answers to key questions while allowing the seller to control access to potentially sensitive data. Beyond logistics, having a well-prepared data room also communicates to potential partners that the process is competitive and professional.
- Staged access control: Although it’s important to allow serious partners access to the information needed to address their questions, it is often advisable to hold back the most sensitive information until later stages of diligence. For this reason, data room access is often divided into two or more tiers, with the most serious partners who have already conducted initial diligence being granted access to the higher, more sensitive tiers. Typically we like to have companies submit a non-binding term sheet prior to getting full access; this ensures that they are taking the opportunity seriously.
- Clear timelines: While diligence can be time consuming, running a protracted diligence process without a lot of ongoing engagement from partners is not productive. Communication of timelines for each stage of diligence can help avoid this issue. When data is provided in answer to diligence questions, there should be some understanding of how long the review of that data will take and when the next round of feedback or questions is expected.
Although engaging partners in due diligence is a positive indicator of a deal’s chances of a success, it can be resource intensive for both parties and is often a point where deal discussions break down. By following general best practices and establishing clear communications about expectations and needs on both sides, you can make efficient use of resources and maximize the chances of successfully progressing to the next phase of the deal.
Please feel free to reach out to me at nick@locustwalk.com if you would like to learn more about the due diligence process.
Written by Nick DeLong