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The Best Offense is a Good Defense in M&A Transactions

March 27th, 2012

When dealing with a company looking to sell, due diligence on the seller in advance of papering the transaction can result in a higher price, a shorter negotiation period and less negotiation of the terms contained in the definitive agreement.

More and more sellers are hiring independent advisors to undertake due diligence on the company, assets or division prior to going out to the market to find a buyer. Independent pre-transaction due diligence can identify risks and exposures that may be detrimental to the negotiation process once a suitable acquirer is identified. Due diligence usually covers accounting, finance, tax, IT and compensation. Independent due diligence can help a seller get a purchaser’s view of sustainable earnings before interest, taxes, depreciation and amortization (“EBITDA”) and the appropriate level of working capital. Two key negotiating points are generally the sustainable EBITDA to apply a multiple and post-transaction working capital adjustments. Defining these in advance can reduce hurdles down the road.

Sell-side due diligence provides the seller with an independent review from the buyer’s perspective and can allow for better preparation for an ultimate transaction. Pre-transaction due diligence can also help provide definitions for key terms that will be included in the ultimate definitive share or asset purchase agreement.

Evans & Evans is uniquely positioned to assist with pre-transaction due diligence given our experience at providing independent due diligence, combined with our track record in the M&A space. For more details on pre-transaction due diligence please contact Mike Evans.