M&A Madness: Quick-Start Guide to Due Diligence
Whether you’re vetting a new EHR or a new partner, due diligence is an essential part of the process. In general terms, it’s simply doing your research to ensure you make good decisions. But when it comes to mergers and acquisitions, it plays a much more important role.
Due Diligence Basics
Simply put, due diligence is the research and analysis of a practice’s financials, operations, and legal documents in preparation for a sale or merger. In an acquisition, prospective buyers review materials and information provided by sellers. In a merger, due diligence usually includes a review of both entities’ information to ensure that a partnership will be beneficial for each.
Feel like a babe in the woods when it comes to all you must know to successfully sell your practice, buy another practice, or merge practices? Here’s a cheat sheet on what buyers, attorneys and accountants are looking at.
For a complete guide to due diligence, plus The Ultimate Due Diligence Checklist, download our toolkit here.
Due diligence minimizes risk
Due diligence is a process that helps minimize the risk of buying or merging with another practice. Because of the number and complexity of state and federal regulations, acquiring or partnering with another practice can be incredibly risky—hidden compliance risks and unanticipated liabilities can be financially disastrous.
Due diligence affects negotiations
It should happen early in a transaction—but not too early. Thorough due diligence brings to light potential risks and opportunities, so the findings are essential to effective negotiations. But it also takes a lot of time, effort, and resources. Before committing to the full process, buyers and sellers should conduct an informal investigation to identify any obvious deal breakers.
Both buyers and sellers play a part
Due diligence works best as a collaborative process where buyers and sellers work together to move a transaction forward. Buyers should submit a detailed due diligence request to the seller that clearly identifies what materials they require. Sellers should ensure that requested materials are complete, well-organized, and forwarded to the buyer in a timely manner. Keep in mind that based on their initial review, buyers may request supplemental information, including interviews.
Prevent foreseeable problems
It’s common to uncover issues during the process, and these obstacles can seem insurmountable to nervous buyers and sellers. But attorneys and other experienced mergers and acquisitions (M&A) professionals expect to find and address discovery items while keeping the transaction on track. It’s usually possible to resolve most hiccups, negotiate the contract, and allocate risk in a way that is satisfactory for everyone.
What happens after?
When the process is complete, the parties should be able to make most major decisions regarding the transaction. Options include:
- Proceeding with the transaction on the original terms (those stated in the Letter of Intent).
- Moving forward, but negotiating changes to the terms based on the due diligence findings.
- Walking away from the deal.
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