Beware of pitfalls!

Due diligence (from the English: " [checked with] due diligence" - checked with due care) can take up all subject areas in the form of an overall audit. More often, however, individual areas are examined, such as the financial situation, taxes, the legal situation, IT resources and risks or personnel issues. The audit is documented in a report; depending on the client's wishes, either comprehensive or as an executive summary focused on the risks with a red flag report. This points out, for example, cluster risks in the customer portfolio, delivery bottlenecks of core products or missing licenses, but also provides information about the EBITDA/EBIT generated sustainably by the object of purchase.

The results provide the buyer with certainty for his decision and a basis for negotiation with the seller. Within the company, this professional third-party opinion serves as orientation and as a basis for discussion.

Buyer profile decides
Which areas are subject to due diligence depends on the information needs and risk appetite of the buyer. A financial investor or a large company that wants to grow, diversify or expand abroad will seek a broader examination than a private individual who is planning to buy a business for the purpose of self-employment. Nevertheless, even this private buyer does not have to forego an in-depth due diligence. If the objectives of the due diligence are carefully clarified in advance, the scope of work (SOW) can be clearly defined and narrowed down. The buyer receives all the information relevant to the purchase decision without incurring unnecessary additional expense.

Due diligence process as a building block for a solid basis for negotiations
Communication between the client and the advisor, but also with the seller, is fundamental for a successful and resource-saving due diligence. Transparent and appreciative cooperation thus prepares the ground for later negotiations.

Creating this basis of trust is an important by-product of the due diligence process. There are some pitfalls along the way.

Exasperation and mistrust due to poor preparation
Granting access to business documents is a big step, both psychologically and economically. In addition, setting up a data room - today mostly virtual - can be very time-consuming. Frequent requests for ever new documents can therefore quickly create an atmosphere of annoyance, if not of mistrust. The seller's M&A advisor must anticipate the due diligence process and stay on top of the data room and data quality. In addition, an uncoordinated approach by the advisor can put undue strain on the people involved on both sides in their double burden between day-to-day business and transaction and lead to resentment.

Comprehensive planning saves time
It makes sense to work out a realistic timetable and not to start the due diligence process hastily. Comprehensive preparation includes a meaningful and conclusive list of all required information and a lead time for the seller side. Small companies usually do not have comprehensive data or written contracts of all agreements made. There, pragmatic handling of missing data helps to ensure a smooth process (e.g. by means of interviews, contract clauses, etc.).

Consultant as intermediary
The advisor also has a mediating function when there are cultural differences between the seller and the buyer. These can arise due to differences in company size or business models, or in the case of international transactions. Special tact is required here. For example, the advisor will notice differences in the inspection behavior of European neighbors, where the need for information can differ greatly from Swiss customs. If you are even moving in the Asian market, irritating reactions can be triggered, which can be explained by strict hierarchies or the fear of losing face.

Too long ways
Sometimes a tight schedule cannot be avoided. The laws of the market often require rapid action. The advisor who is actively involved in the transaction process is at an advantage. He knows the answers to short-term questions and thus saves long distances and response times. Fast action can be decisive for a match.

Transactions by private individuals are more emotional
It is not so much the speed as the starting position for financing that is a particular challenge for private buyers. If a craftsman is interested in a business in order to become self-employed, he will usually invest his savings. In most cases, his entire existence - including that of his family - depends on a successful outcome. This places further demands on the due diligence in addition to the usual risk analysis: even if the scope of work has been limited to a sub-area, the advisor should feel responsible for keeping an eye on risks in all sub-areas and pointing out unexpected risks to the buyer.

With pragmatism and common sense
In this constellation, the consultant is also an exchange partner. He keeps an eye on the big picture and has the courage to recommend a termination, even if the client is so enthusiastic that he ignores the weak points.

The buyer can be spared high costs and emotional ups and downs if the advisor uses common sense instead of stubborn procedural loyalty. If conspicuous risks become apparent in the course of the audit, the client should be informed directly and unbureaucratically and not referred to the outstanding report.

Due diligence for sellers
Vendor due diligence or vendor assistance is rarer than due diligence for the buyer side - but just as useful. In larger projects, it offers added value in order to point out possible weaknesses of the company in advance and to make the transaction process more efficient.

Relationship between client and consultant as a success factor
Whether buyer or seller due diligence - an experienced advisor knows that the biggest pitfall is the interpersonal relationship between client and advisor. The intensive cooperation during the process must be based on trust and open communication. It requires a feeling for the needs of the client. A promising due diligence takes into account the size of each company individually. It gives both sides the feeling that they are pulling in the same direction and that they are carrying out a transaction that is satisfactory for all parties involved.