Due Diligence Process Demystified

DUE DILIGENCE PROCESS DEMYSTIFIED

Due diligence is a critical process in M&A transactions that typically begins in earnest after the Letter of Intent (LOI) has been signed. Demystifying this process helps both buyers and sellers navigate the complexities of a transaction with greater confidence and efficiency.

What is the Due Diligence Process?
Due diligence is an in-depth assessment conducted by the buyer to confirm information previously disclosed by the seller prior to signing the LOI and to further identify potential liabilities, risks and opportunities of the transaction.  This disclosure process also allows the seller to mitigate its potential post-sale risk.

Findings from due diligence often impact key items to be negotiated between the parties in the purchase agreement, including transaction structure, purchase price, payment terms, and the seller’s representations, warranties and indemnities.

How Does the Due Diligence Process Work?
A standard due diligence process includes:

1. Information Request: After the LOI has been signed, the buyer will provide the seller with a comprehensive information request list, including categories such as corporate governance, financials, tax matters, intellectual property, and employment records, among others.
2. Seller’s Responses: The seller and its M&A advisors compile relevant information, often uploading documentation to a secure online data room. Diligence meetings may also be held to verbally clarify key questions or requests.
3. Review and Follow-Up: The buyer and its advisors analyze the seller’s responses and documentation, often requesting additional information as necessary.
4. Ongoing Evaluation: The process continues until the buyer is satisfied, often extending right up until the transaction’s closing.

Additionally, if the seller is reinvesting sale proceeds into the buyer’s company (i.e., rolling equity), a limited review by the seller and its advisors of the buyer’s investment documentation and business may also occur.

Potential Areas of Concern for Roofing Companies
In conducting due diligence, knowledgeable buyers will often pay particular attention to issues common in the roofing industry, such as the following:

• Financials reported on a cash basis instead of an accrual basis
• Construction agreements noncompliant with state law
• Potential misclassification of independent contractors
• Pending litigation or claims
• Failure to have registered in all operating states
• Missing industry-specific licenses, permits, or registrations
• Other state-specific regulatory, tax, and compliance issues

While sophisticated buyers will expect that there will be certain issues with the seller’s business that will need to be addressed, these issues can often slow the transaction creating unwanted additional expense and delay.

Preparing for the Due Diligence Process
We recommend that sellers engage M&A advisors early in the sale process to identify and resolve potential issues, especially before entering into an LOI. Organizing diligence materials and addressing potential issues in advance will help a seller to better plan and streamline the process during a time that will be much less hectic than during the heat of the transaction.

Sellers should also consider if key employees having particular knowledge of the business may be required to be involved with diligence. However, because confidentiality of the transaction is always critical for a seller, any key employees brought into the process should be made aware of its importance.

Conclusion
Dvorak Law Group has a nationally recognized track record in successfully closing transactions involving roofing companies. Our attorneys are ready to answer questions as to the due diligence process and otherwise guide you through your M&A transaction.