5. Due Diligence Flashcards
Due Diligence Definition
Due diligence is a detailed and thorough examination and analysis conducted by an organization prior to making a business decision and commonly applies to voluntary investigations.
Purpose of Due Diligence
- To bring together legal and other professionals with specialized expertise whose collective responsibility is to:
a. Perform an investigation of a business, situation, activity or person
b. Assess the health and viability of a business or entity
When to use Due Diligence
- Merger and/or acquisition
- Purchase of new assets, particularly real property
- Development or modification of a product, service or process
- Undertaking of a joint venture or contract
- Establishing or altering relationships,
SWOT Defined
– A SWOT analysis is a common method of analyzing where the organization has its strengths and weaknesses as well as analyzing what threats and opportunities exist to determine internal and external opportunities available to an organization
- STRENGTHS
WEAKNESSES
OPPORTUNITIES
THREATS
Motivations to prompt change
- To eliminate competition
- To fill in talent gaps
- Gain cost-efficiency
- Strengthen customer relationships
- Adopt new technologies
- Expand market share
Mergers and Acquisitions - What about another organization might you want?
- Market Share
- Infrastructure
- Processes
- Expertise
3 Types of buy‐sell agreements?
- Merger – two or more organizations agree to move forward as one new entity
- Acquisition – one organization takes over all or part of another organization and is established as the new owner with ownership interests continuing unchanged
- Divestiture – when an organization decides to sell off investments or business interests in a subsidiary
Structures of Mergers - Types of Mergers
- *Types of Mergers**
1. Horizonal - Firms in same industry
2. Vertical - Companies with buyer - seller relationship
3. Conglomerate - Unrelated companies
Due Diligence Process - 4 Steps
Step 1 - Strategy and Expectation
Step 2 - Identification and Analysis
Step 3 - Decision Making with Teams
Step 4 - Post - Transaction
Due Diligence Team
Risk Manager
Senior Leaders for each key functional business area
Legal Representation
Due Diligence Team - Key Responsibilities
- Explain the purpose, nature and structure of the deal
- Explain the expected scope of the due diligence team’s efforts
- Explain any issues related to the process
Identification and Analysis
- Background information – conduct interviews, check references
- Company information – discontinued products, services or operations; successor liabilities from previous acquisitions or consolidations
- Financial information – review financial documents, cash flow funding mechanisms
- Key exposure areas (depending on type of business), e.g., products/general liability; environmental; workers compensation; contractual and professional liability; business interruption and extra expense; regulatory agency citations; fines; and improvements required by OSHA, EPA, EEOC, ADA, etc.
• Risk management program: Program activities and functions
Risk financing arrangements – retrospectively rated plans, pools, captives, retentions and TCOR
Loss history and insurance information including policies, claims‐made policies, tail coverage, premiums, claims records, workers compensation experience modifier and litigation records
Due Diligence - Decision Making with the Team
- Report back findings from Step 2 – summary of the exposures uncovered, appraisals and estimates, expert and professional reports
- Perceived value from the transaction
- Liability that will be assumed through the transaction
- Identify any critical transition issues
- Integration issues, facility closures, new construction, retrofitting, etc.
- Determine impact on other functions within the organization
- Identify the worst‐case scenario in any given situation with an estimate of what is most likely to happen
- Review key assumptions and make recommendations to management
- Tax implications and structure of the sale (entity, asset, liability)
Mergers and Acquisitions- Step 4 Post Transaction
- Identify and address new exposures
- On‐site inspection of locations, particularly if subject to closing
- Organizational structure, culture, leadership, policies and procedures
- Consolidate or separate programs
a. Human resources
b. Risk management departments (consolidation or separation)
c. Safety
d. Other departments (legal, accounting, etc.)
e. Insurance
f. Claims management
