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CT Expert Insights: The Importance of Due Diligence for Mergers, Spin-offs and Finance Agreements

When it comes to structuring a deal, the devil is in the details. Strategic planning for a merger, spinoff or finance agreement is key to ensuring success. Some deals can take several months to a year to complete, so understanding what everyone’s role is, as well as what needs to happen when makes due diligence less chaotic. Ian Bone, Sr. Manager of Strategy and Innovation at CT Corporation, discusses the deal process lifecycle from preparation to post-closing, as well as last minute issues that can delay or threaten a deal.

 

 

TRANSCRIPT

Greg: Hi, I’m Greg Corombos. Our guest this week is Ian Bone, Senior Manager of Strategy and Innovation for CT Corporation. He’s here to talk about how to do the deal the right way. Whether we’re talking about a merger, a spinoff, or a financing agreement, the details are very important. And Ian, thanks very much for being with us.

Ian: Thanks for having me.

Greg: When it comes to the due diligence in evaluating a deal before you sign the dotted line, what are those key areas to look at when it comes to due diligence?

Ian: Of course, the financials are very very important. That’s probably the main thing that people think about when it comes to due diligence, getting deep into the numbers, making sure a deal is going to make financial sense. But it’s also very important to understand the operations of the company, if there are any operational risks, if there are any legal liabilities you may be inheriting, who actually owns the intellectual property you think you are buying, and making sure the company you’re getting is definitely what you think it is. There are a lot of interesting ways that companies can be structured these days, especially if you’re buying something that came from a spin-off. So actually make sure that you’re getting the assets you think that you have, with the customers that you think that they have, and identifying any key risk points or potential deal breakers that might be out there.

Greg: Of course if you’re putting the deal together, the goal is to win the deal. So there are a number of different aspects to try and make it more attractive to whoever else is involved here. It could refer to capital investment and involvement, and simply making the deal the most attractive if there are other competitors out there. So what are the keys to that?

Ian: Obviously, making sure that you have your capital lined up is a very important thing. There are a lot of different sources you can go to these days. When you buy a house, you go to the bank for a mortgage. But when you’re buying a company, there are a lot of different financing providers you could be going to, capital providers. So making sure you understand that, that you have that balance properly with what you’re trying to do in your deal, whether it’s short term, long term, side-by-side joint venture partnerships, co-investing, that you have it all set up right.

But also making sure that the seller is looking for the best deal—you’re looking for the best deal—you should both be trying to win together. We’ve seen a lot of things with the narrative of what you’re going to do with the deal, how you’re actually going to be taking this company and continuing to grow it, whether the seller is going to stay involved or not, which can also affect your structuring of the deal and how you buy the seller out over time, perhaps, instead of in a lump sum. So a lot of things go into it. Really making sure that every party involved is in the best position when they come out of the deal, and that everyone is really a winner when they’re getting this done.

Greg: Ian, there are so many moving parts to any significant deal, so there are many different areas that you need to focus on to make sure that the deal goes smoothly. Let’s just talk about a couple of those in the time that we have. First of all, with respect to strategic planning. What do you need to keep in mind there?

Ian: Just like in real estate—location, location, location—with deals its planning, planning, planning. Making sure you have a strategic plan for how you’re going to be managing things throughout the deal process, which can sometimes become quite long. And that you’re very well tied in with your lawyers and financial advisors, and things like that. And sellers, also. That you have everything lined up for what that process is going to look like, that you look at all your partners who are out there, everyone is on the same page, everyone is communicating well. Communication is key. Somebody dropping the ball is going to be the thing that kills the deal or cost you a lot of extra money you weren’t expecting to spend.

But also, planning ahead for the future so that post-close you know what you’re going to do, how you’re going to deploy things, what your strategy is going forward so that you’re not just left holding a basket of goods that you thought you could do something with and nothing actually gets done.

Greg: How about when it comes to preparation?

Ian: Preparation with your partners. So that’s sitting down and understanding, what is your lawyer going to do, what is the bank going to do, what does the bank expect of you? Who are the other players in this, who are your different due diligence providers? How involved are they in each step? Where are the choke points that you might be running up against? We definitely see here at CT, there are times that people need something with a one-hour turnaround. Sometimes [it’s because] something changed last minute and they need to have it done right. And sometimes there was some mismanagement on time and planning, and all of a sudden they realize that item number 49 on their checklist is actually the most important one, and they could have maybe had that done earlier on.

It’s important to plan for what your time frames are and when things need to happen by, but also make sure you’re working with partners that can step in if something critical really happens at the last minute, that you need to make sure to get done for the deal to happen.

Greg: As you explained so well, this is a fairly lengthy process--or at least can be, depending on the type of deal that’s being arranged. When it comes to managing the deal process life cycle, what does that look like?

Ian: It’s really something you need to have a plan for going in, what that process is going to be. These things have a wide range of timelines. If you’re going out and getting financing, that might only take a certain amount of time. If you’re doing a spinoff, that’s not just internal preparation to separate the businesses and decide what’s staying where and who’s going with what, but then you have to find the buyer or the exit plan for that and act on that. And if there is an exit plan where you’re selling off part of the spinoff, then you get into the same timeline for an acquisition, but on the other side. So you could be looking at anywhere from a couple months to get through the due diligence and the rigmarole that’s in a financing to a multi-month or -year process if you’re doing a spinoff that involves the acquisition by somebody else. Understanding what you’re trying to do strategically for your company, what kind of turnaround time you need to get it done—which will affect what kind of counterparty you’re willing to take on if you need to sell something quick—then your returns may not be the same as if you could be more strategic about where something is going.

Same thing with buying. If you want to buy it now, you’re probably going to pay a premium to get it done quicker. Understanding what that is, having a plan, working with partners that understand that, being very clear in your communications about what needs to be done and on what timeline is really crucial to coming out of the end of it with the expectation to [when you] went in.

Greg: You mentioned earlier about priorities can shift in the process of working out the deal. Line item 49, you mentioned, could end up being number one. There are also things that you can potentially anticipate being problems, but sometimes you can’t. So what are some of the common or last-minute issues that can delay or even threaten one of these deals?

Ian: We’ve seen a lot of different things pop up in due diligence that you weren’t expecting. It could be that you’re looking at buying a company and there’s some reputational risk that you never expected to be there. Maybe there’s an executive you find out has close political ties to a client, or something like that. Contracts that you didn’t realize, and now you need to reevaluate if you want to complete this. What that involves...maybe there’s somebody who is too crucial in the business, that you need to add in extra things to make sure they stick around. That they’re not getting their payday and disappearing with all the clients you thought they were holding in there. That they were the one skilled person.

It’s about being nimble and reacting to things. You can’t just go in blindly and say, We’re going to get this deal done no matter what. That everything has a way to be resolved. You have to remember that if you’re a buyer of a company, that the seller...everyone’s kid is the smartest kid in class. The company is their baby; it’s like their child. They’ve been nurturing it and growing it and preparing for this moment to go off into the world and be sold to you. They think it’s the most special snowflake ever. But you may find out that it’s maybe not the best thing. So you’ve got to find very political ways of coming to agreements on what you’re really taking on. We’ve had a food manufacturing company that I found out had a couple incidences where they’ve had product recalls about allergens in the food. So you go in and make sure they’ve actually fixed those problems. If they haven’t, find out why. If it’s a systemic issue, then it’s something you really need to evaluate whether you want to take that on. Can you solve that? Sometimes you can find out about the company culture as you’re interacting with people throughout the deal process and that may change how you view things. It’s about going in with your eyes open, having a plan, but being nimble on how you react to what you find. But there’s always a solution to get to the end. It’s just making sure you get to the end you want to be at.

Greg: Quick exit question for you, Ian. Obviously, we’ve been talking about due diligence throughout our conversation here. But knowing what to provide due diligence on is critical. So what kind of checklist, what kind of ability is there to know the bases that need to be covered throughout this process?

Ian: I would be a bad person if I told you there was just one checklist you need to follow. There are a lot of different thing by industry. So really, making sure to educate yourself about what industry you’re going into in a deal, to make sure you have the appropriate checklist there. Lawyers are generally very good about knowing this information, as well as if you have an investment banker helping you. What I would say is there are certain industry-specific elements that you need to tack on your basic checklist of due diligence. Making sure that you have all those bases covered, whether you’re exposing yourself to certain environmental risks with something, or operational, if there’s a lot of supply-chain elements. If there’s a lot of intellectual property with a tech company. So, there’s kind of a basic guideline that lawyer will help you do. But when you’re selecting who you’re working with and who your partners are, making sure that they have the deep industry expertise to know what to add onto your due diligence process is very important

 

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