What is Confirmatory Due Diligence (2024)

So what's the difference?

The meaning of due diligence is the act of investigating, analyzing, and fully understanding the details of the matter under consideration. Even if you are not aware of it, we all do diligence on basic transactions in our daily lives. For instance, when you're buying a house, you want to see the inside of the house, the neighborhood, the furnishings, materials used in the construction, and many other things.

However, in the matter of M&A and the complexities of buying a business, diligence is separated into two phases.

Preliminary Due Diligence

The purpose of the preliminary due diligence is to get a basic understanding of the target company. You already know who they are and what they do, but you haven't decided yet whether this acquisition will advance your strategy or not. This includes getting sensitive information that the seller is willing to provide for you to assess and evaluate their company correctly and accurately. Typically, you will be required to agree and sign a non-disclosure agreement (NDA) before you can access such information.

During this phase, you will get an overall sense of the company's financial condition and capability, as well as marketing, sales and manufacturing processes. This will allow you to get a more accurate estimate of the company's value and determine the price that you are willing to offer. In short, you are here to answer the questions: should you buy this company? Will it advance your strategy? Will it fit in your company?

Another significant difference between the preliminary and confirmatory diligence is the timeline. Preliminary diligence is at the front end of the deal, right after you sign an NDA. It is designed to be early in the process so that you can save time if the deal is not suitable for you. You want your diligence to be as efficient as possible to carry out its purpose.

Confirmatory Due Diligence

On the other hand, the confirmatory due diligence process is much more detailed and is known as formal due diligence. When you are in this phase, you know you want to buy the target company unless something catastrophic happens. The goal of this process is to confirm every assumption that you have regarding the company. You are now looking for risks and liabilities that you will be inheriting after the deal is closed.

Also, this would be the best time to plan for integration. As you are looking at the entire company, planning how it will look after the deal is closed is in your best interest. There will be many risks that you will uncover in this process and you need to mitigate those risks before the deal even closes.

The confirmatory due diligence process happens right after an LOI or term sheet has been issued. LOI signifies your formal offer to the target company and sometimes includes the initially agreed terms between the two parties. And because of the degree of certainty to close, it is now time to bring in your team to help you investigate the target company.

The M&A Team

Because of the scope of work that needs to be done in the confirmatory due diligence process, you need to have a dedicated group of professionals to help you conduct your investigation. Your team may or may not need more than what is listed below, but this is just the commonly used team breakdowns with a high-level view of their roles and responsibilities.

Legal Corporate Team

The legal corporate team is an essential part of your M&A team during confirmatory due diligence. This team usually consists of external parties working with your internal lawyers, all with the primary task of coordinating entire legal diligence. They are the ones who look at the business capitalization, review the board minutes and plans, assess how the target business is incorporated, and determine if the seller has the adequate authority to sell the company.

They are also the ones responsible for uncovering lawsuits and debts that the target company may have. This could be a deal-breaker and needs to be detected and mitigated as quickly as possible.

Outside of their diligence role, they are also responsible for negotiating and drafting all the agreements, including the purchase agreement. They are the ones talking back and forth with the seller's legal counsel to adjust language and terms in those contracts.

Legal IP Team

The next team on the list is the legal IP team. This is extremely important, especially in the tech business when most transactions are about intellectual property. Their primary role is to ensure that the seller has proper ownership of the intellectual property that is being purchased, and that the IP will be correctly assigned to the buyer post-close.

If the seller doesn't have proper ownership for some reason, then it's up to the legal IP team to protect the buyer from outside parties who can claim rights to the IP. This could be a previous employee who knows, and has worked, on the IP for years but didn't correctly sign over their rights to the seller. This could be a massive exposure to the buyer if that employee claims ownership post-close.

In this situation, the team usually tracks down the employee and buys the IP from them to prevent future litigation and mitigate the risk. Sometimes, they also amend some of the seller's agreements, such as; customer, contractor, and vendor agreements, before the deal even closes.

Legal Commercial Team

This team is specifically focused on the customers and vendor contracts. They also work very closely with the legal IP team, who will have some overlaps while looking into the risks associated with the contracts.

Their primary focus is to assess the risks, limitations, and liabilities that the seller took on in the agreements. Those contracts can be excluded from the transaction, or a special type of protection would be incorporated in the purchase agreement if it's too much.

HR Team

Arguably your most crucial non-legal team is the human resources team. They will focus on the employees of the target company, which is an essential part of capturing the deal's value. Their primary goal is to review employment contracts and they should be working closely with the legal corporate team.

The first part is the liability section and truly understanding any Fair Labor Standards Act (FLSA) issues or violations. They ensure that the employees are appropriately compensated and have all the legal benefits required by the law to avoid risk exposure post-close. They also compare the difference between the benefit packages of both companies and figure out how to bridge the gap.

The second part of their role is the retention section. This includes identifying who the key talents are in the target company and developing retention strategies. The HR team is also hugely, but not solely, responsible for assessing the target company's culture.

Accounting Team

The accounting team is responsible for reviewing the financial statements of the target company. This is a more in-depth review compared to the one completed during preliminary due diligence. Typically, this is a third-party team hired by the buyer to remove bias and improve objectivity.

The primary goal is to confirm the accuracy of their financial statements. It could go as far as digging into invoices, contracts, and employment arrangements to ensure that the revenue and balance sheets are in order. Another important role of the external accounting team is to provide a quality of earnings report (QofE).

They will work with the internal accounting team to review the balance sheet and come up with an overview of the assets and liabilities that the buyer will take on post-close. They will also need to develop an agreed-upon networking capital mechanism usually agreed upon in the LOI.

Tax team

A tax team is also a third-party group of accountants, usually hired from the same firm where as the accounting team. Their sole purpose is to review the tax compliance of the seller, the accuracy of previous filings, and determine the potential exposure if there are errors and discrepancies. This includes direct and indirect taxes on the sale.

If there would be discrepancies, the team needs to inform the authorities and disclose them voluntarily. Additional payments must be made to adhere to any penalties associated with that violation. The tax team will need to generate the total number of costs to mitigate this exposure.

Lastly, this team will work directly with lawyers and help the buyer understand the most advantageous way to set up the deal from a tax standpoint.

IT team

The information technology team is responsible for assessing the technology of the seller. This includes computers, laptops, software, servers, and any other technology devices they use in their operations. The goal is to compare it to what the buyer is using and then calculate how to bridge that gap.

Usually, a more prominent company is buying the seller, and therefore they will have more advanced equipment. To bring the incoming company up to par, some equipment needs to be replaced and updated. The IT team is in charge of identifying the necessary upgrades and evaluating the cost of those upgrades to integrate the acquired business into the buyer.

Real Estate team

This is an optional team because not all transactions will have real estate. But if the seller happens to have a building or office, you need to have a dedicated team to handle the real estate. The real estate team is in charge of looking at what happens to the property post-close.

If the seller is leasing the said property, then the real estate team needs to develop a new lease or a contract that would assign the existing lease to the buyer. This will vary depending on the situation and type of language and restrictions that the existing contract includes.

However, suppose the seller owns the infrastructure. In that case, the buyer needs to decide whether to include that infrastructure in the transaction, build or rent a new facility to accommodate the newly acquired business, or come up with a lease agreement with the seller. This team will be responsible for doing the diligence on the property as to how much it costs to buy or rent.

Insurance team

This team is responsible for reviewing all the insurance policies of the target company. If they have inadequate protection, the buyer could require the seller to purchase such insurance before the deal is closed. If the seller refuses to acquire proper insurance for a big issue, then it could also be negotiated in the purchase agreement.

Treasury team

When it comes to cash and bank issues, the treasury team is the one in charge. They will need to be more involved in the deal if the buyer has non-existing cash or line of credit and need capital raising efforts.

However, their primary role is to handle the bank transaction. If the buyer is inheriting a bank account in the name of the business that they are acquiring, then the treasury team is the one to facilitate that transition.

For instance, if the seller has existing cash in the bank account, withdrawing that full amount will cause issues from a business continuity standpoint. The treasury team will work closely with the corporate development team to understand the business's monthly and weekly cash needs and fund that bank account to avoid issues.

There are also instances where the seller leaves money inside the bank account, and that is just added to the overall purchase price.

Conclusion

These are all live discussions and documents constantly being fed to the deal team to provide the best protection for the buyer and negotiate the best purchase agreement possible.

If there are major and significant discoveries during the confirmatory due diligence, it usually results in a renegotiation of the purchase price initially agreed upon in the LOI. The worst thing that could happen is the buyer's walk away from the deal due to an unsolvable issue.

But if all things go well, the buyer and the seller will then proceed to sign the purchase agreement and formally close the deal.

What is Confirmatory Due Diligence (2024)

FAQs

What is Confirmatory Due Diligence? ›

The confirmatory due diligence process is typically initiated once a Letter of Intent or term sheet is issued, and aims to confirm all assumptions that buyers have about the target of their acquisition.

What are the three 3 types of diligence? ›

Due diligence falls into three main categories:
  • legal due diligence.
  • financial due diligence.
  • commercial due diligence.

How long does confirmatory diligence take? ›

Typically, Buyer Confirmatory Due Diligence is conducted during a 90-day period of exclusivity after the execution of a Letter of Intent between the buyer and the seller.

What are the three examples of due diligence? ›

Other examples of hard due diligence activities include: Reviewing and auditing financial statements. Scrutinizing projections for future performance. Analyzing the consumer market.

What does it mean to be referred for due diligence? ›

Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.

What are the 4 P's of due diligence? ›

Four less tangible principles can also play a role in manager selection: passion, perspective, purpose, and progress. Among various other elements, Gridline's due diligence process focuses on these “four P's” to identify the best possible managers for our clients.

What are the different types of due diligence? ›

The 7 Main Types of Due Diligence in Mergers and Acquisitions
  • Financial Due Diligence. ...
  • Legal Due Diligence. ...
  • Operational Due Diligence. ...
  • Human Resources Due Diligence. ...
  • Intellectual Property Due Diligence. ...
  • Environmental Due Diligence. ...
  • IT Environmental Due Diligence.
Oct 30, 2023

What does a confirmatory test do? ›

Screening or presumptive tests make use of a target chemical to establish the possibility that a specific body tissue or fluid is present. Confirmatory tests are then used to identify the specific biological material, which can then be typed. The line between screening and identification is not always clear.

What happens if you back out after due diligence? ›

Once the due diligence period ends, the buyer cannot back out of the contract (except under a different, applicable contingency – financing or appraisal, for instance). If they back out prior to closing and no other contingency gets them out of the contract, they lose their earnest money.

When should you do a confirmatory test? ›

Confirmatory tests should be performed on separate solutions of some of your ions, in order to see what these tests look like before using them on an unknown. Generally a confirmatory test is used only after other reactions have been used to isolate the ion.

Is due diligence a good thing? ›

Due diligence is crucial for several reasons: Financial Loss: Without proper due diligence, you risk entering transactions with customers who may default on payments, engage in fraudulent activities, or lack the financial stability to honour their commitments. These situations can lead to substantial financial losses.

What is due diligence in simple terms? ›

Definition: Due diligence is the process of examining all the material facts of a contract or a deal before a legal contract is signed by both the parties. Put differently, it could also mean verifying the accuracy of a statement.

What is a good example of due diligence? ›

There are many possible examples of due diligence. Some common examples include investigating the financials of a company before making an investment, researching a person's background before hiring them, or reviewing environmental impact reports before committing to a construction project.

Who pays for due diligence? ›

The due diligence fee is a payment from the buyer to the seller that is non-refundable and is negotiated between the buyer and seller. If the property gets to closing, then the due diligence fee is deemed part of the buyers down payment toward closing costs.

What to expect during due diligence? ›

Due diligence is defined as an investigation of a potential investment (such as a stock) or product to confirm all facts. These facts can include such items as reviewing all financial records, past company performance, plus anything else deemed material.

What is due diligence concerned with? ›

A due diligence check involves careful investigation of the economic, legal, fiscal and financial circ*mstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion.

What does diligence look like? ›

Diligence can be defined as “steady, earnest, and energetic effort: devoted and painstaking work and application to accomplish an undertaking.” A key element necessary to maintaining diligence in all circ*mstances is learning the power of responsibility, flexibility, and desperation.

What is an example of diligence? ›

Examples of 'diligence' in a sentence
  • There was no evidence of any due diligence about the people who received the cash. ...
  • The shortlisted bidders are being given access to due diligence and management meetings.
  • They have not told me or the police that this owner can verify the purchase was carried out in due diligence.

What is one example of diligence? ›

the quality of working carefully and with a lot of effort: She hoped that her diligence would be noticed at work. The exhibition has been researched with extraordinary diligence. His diligence motivates others to give a little more.

Top Articles
Inside tips from those who live here - Whistler on a dime.
Dehydration in Seniors: Symptoms & How to Recover
Pikes Suwanee
Fbsm St Louis
Christine Paduch Howell Nj
Christine Paduch Howell Nj
Woman who fled Saudi Arabia reaches her new home in Canada
Pjstar Obits Legacy
Frivlegends.com Unblocked
Indianapolis Star Obituary
Loss Payee And Lienholder Addresses And Contact Information Updated Daily Free List Bank Of America
Die eID-Karte für Bürgerinnen und Bürger der EU und des EWR
Best Pizza In Westlake
Shadow Under The Mountain Skyrim
Oviedo Anonib
Sprinter Tyrone's Unblocked Games
Craigs List Rochester
Southern Food Buffet Near Me
2068032104
Sevierville, Tennessee: Idyllisches Reiseziel in den Great Smoky Mountains
Will Certifier Crossword Clue
Pge Outage Map Beaverton
Reahub 1 Twitter
Berklee College Of Music Academic Calendar
Forza Horizon 5: 8 Best Cars For Rally Racing
Dynasty League Forum
Understanding The Payment Structure Behind Online Slot Machines
Panty Note 33
Brake Masters 228
Craigslist Pets Seattle Tacoma Washington
Craigslist Ct Apartments For Rent
Quiktrip Maple And West
Restaurants Near 275 Tremont St Boston
R/Sandiego
Gabrielle Abbate Obituary
Sparkle Nails Phillipsburg
Gas Station Near Santa Barbara Airport
Lily Starfire White Christmas
Weekly Math Review Q4 4 Answer Key | airSlate SignNow
Wv Mugshots 2023
Burlington Antioch Ca
Sarah Colman-Livengood Park Raytown Photos
Sierra At Tahoe Season Pass Costco
Norwegian Luna | Cruise Ship
Gun Show Deridder La
Watch Wrestling.up
Nuefliks.com
MERRY AND MARRIED MERRY & MARRIED MERRY + MARRIED MERRY E MARRIED MERRY ; MARRIED MERRY, MARRIED MERRY - MARRIED Trademark Application of Nexus Integrity Group - Serial Number 98485054 :: Justia Trademarks
1V1 Google Classroom
Bourbon Moth Magnolia
Craigslist Org St George
What Is Opm1 Treas 310 Deposit
Latest Posts
Article information

Author: Roderick King

Last Updated:

Views: 6268

Rating: 4 / 5 (71 voted)

Reviews: 86% of readers found this page helpful

Author information

Name: Roderick King

Birthday: 1997-10-09

Address: 3782 Madge Knoll, East Dudley, MA 63913

Phone: +2521695290067

Job: Customer Sales Coordinator

Hobby: Gunsmithing, Embroidery, Parkour, Kitesurfing, Rock climbing, Sand art, Beekeeping

Introduction: My name is Roderick King, I am a cute, splendid, excited, perfect, gentle, funny, vivacious person who loves writing and wants to share my knowledge and understanding with you.