• A comprehensive "pre-diligence" phase begins once an acquisition target is determined to have baseline alignment with the acquiring business’s overall M&A strategy.
  • The goal of preliminary due diligence is to determine whether there are significant red flags or issues that warrant either a substantial change to the offer price or a decision to kill the deal entirely.
  • As competition for deals has increased, PE firms have become more likely to accelerate through the pre-diligence process in order to swiftly reach the exclusivity window that follows an accepted LOI.

M&A activity is executed in multiple phases. It is critical that the buy-side management team align with their sponsor on the objectives associated with each stage of the process up to and including the decision to proceed deeper into the deal or step away from the table.

On the buyer side, pre-diligence is often initiated with the submission of an Indication of Interest (IOI) and culminates in the decision of whether or not to submit a Letter of Intent (LOI).

A seller represented by an investment bank is more likely to solicit IOIs. The IOI is a conditional, non-binding document prepared by a prospective buyer and delivered to the seller to indicate their genuine interest in purchasing the business. It is comparable to a preliminary term sheet, outlining items such as:

  • A rough valuation of the business (typically expressed as a dollar value range or as a multiple of EBITDA)
  • Proposed elements of the transaction structure and the buyer’s ability to fund/finance the deal
  • Requested due diligence items and accompanying rough estimate of the timeline
  • Proposed post-transaction management retention plan
  • Timeframe to close the transaction

Development of the IOI is led by the buy-side sponsor along with input from the portfolio company management team. If an IOI is accepted by the seller, the potential buyer is granted the opportunity to view high-level financials and projections and take a closer look at the operational, commercial, and human capital elements of the business.

Key questions for a potential buyer to ask during the pre-diligence phase include:

  • Is the seller serious about selling the business?
  • If so, why do they want to sell it?
  • What are the seller’s major pain points or non-negotiables for a deal?
  • Are there any potential red flags we were previously unaware of? If so, are they deal killers?
  • Is this trul...