In this article, we will continue to look at due diligence as in the previous article.
When To Conduct Due Diligence
Due diligence is generally carried out after the submission of a Letter of Intent from buyer and signing of a Memorandum of Understanding or a Term Sheet between buyer and seller. Preliminary investigations conducted prior to the submission of a Letter of Intent may also be included in due diligence, but due diligence in the narrow sense, which is a detailed investigation conducted after submission of a Letter of Intent, is generally referred to as due diligence.
How To Conduct Due Diligence
A letter of intent or Memorandum of Understanding include the timing and method of conducting due diligence. Due diligence period may last from one to two months, and in some cases longer than three months. Due diligence period should be as short as possible for the following reasons: seller is usually subject to certain restrictions on important decision-making during due diligence period; the longer the due diligence period, the greater the changes in the business and the circumstances surrounding the business during that period; and due diligence is a burdensome procedure for both parties involved.
The general process for conducting due diligence is as follows.
1. Submission of a list of material disclosure requests to the seller by buyer’s adviser
2. Kick-off meeting between advisers from both sides and experts from buyer
3. Preparation of a data room and provision of disclosure materials to the data room
4. Inspection and investigation of disclosure materials
5. Submission of a list of inquiries and updating of the list of disclosure requests
6. Conducting interviews and field investigations with management and key staff
7. Regular meetings with advisers and experts from both sides
8. Interim debriefing meetings within buyer side
9. Final debriefing meeting within buyer.
Data rooms are increasingly using virtual data rooms where data is stored on cloud servers. Virtual rooms are very convenient as they can be reviewed remotely and several people can review the same document at the same time. On the other hand, it is a very time-consuming task to convert documents that are only on paper into data and store them one by one, which places a heavy burden on seller, and sometimes it is more efficient to review paper files, so we also use a hybrid type combining real and virtual.
Additional due diligence and additional debriefing sessions may be conducted if the process is not completed within a certain period of time or if new issues are identified after completion. When I was a lawyer in Japan, a major deal-breaking issue was uncovered during due diligence conducted at the end of the year on the buyer’s side, and I had to conduct additional due diligence to confirm this issue. I remember working tirelessly over the New Year holiday to examine relevant contracts and prepare a list of contractual details by customers.