Professional Documents
Culture Documents
Art or Science?
Due Diligence Best Practices and Pitfalls
Joel
Lessem Who uses Firmex?
CEO
Firmex •Firmex community includes
over 125,000 users worldwide
•Conducted over 10,000 deals
in the last 18 months
AJS AJS
TO TO
PICK PICK
PICTURE PICTURE
Bottom Line:
We are in an era where everything and everyone must
be questioned and answers verified
Purchase
Purchase Agreement
Agreement
Amendments
Amendments
and
and Protections
Protections
Walk/Run
Walk/Run Away
Away (Hold
(Hold backs,
backs, R+W’s,
R+W’s,
R Indemnifications,
Indemnifications,
Escrows,
Escrows, etc.)
etc.)
i
s
k
Purchase
Purchase Price
Price
Adjustments
Adjustments Ignore
Ignore
(or
(or Terms)
Terms)
Cost
©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 9
Due Diligence Best Practices
• Customers
• Suppliers
– Distribution/how, and who controls?
– Pricing
– Regulations
– Strategic relationships
– Brand recognition
• Management/Human Resources
– Appropriateness of background
– Track record of success
– Honesty (Background check?)
– Strengths/Weaknesses/Holes
– Sense of teamwork
– Compensation/employment contracts
– Incentives (monetary and/or equity)
– Entrepreneurial v. large co. culture
– Operational v. strategic
– Arrangements (related party)
• Other shareholders
– Who are they?
– Can you work with them?
– Incentives?
– Are their goals aligned with yours?
• Special rights?
– Financial
• Historic review
• Recasts
• Projections (reliability)
– Information systems
• Physical Plant, Property and Equipment
– Appropriateness
– Leased versus owned a Replacement value
– Projected capital expenditure requirements
Do:
• Involve an experienced, dedicated team with clearly defined roles
• Discuss potential deal breakers early and often
• Insist on full access to target
• Be persistent and skeptical
• Plan for sufficient time to complete the project
• Develop a Day 1 plan