How to Conduct Functional Due Diligence and Maintain Seller Confidentiality

Q: How often are you able to bring together both buyer and seller functional personnel during due diligence? Some sellers might be sensitive to confidentiality and not open to bringing their personnel into the fold.

A: When conducting due diligence, we advocate a functional approach, where leaders from the buyer’s organization meet with the seller’s. There are a number of advantages to this approach including paving the way for a much smoother integration once the deal is complete. However, sometimes you have cases where the seller, most often the sole owner of the company, wants to keep the deal quiet for as long as possible. Of course, it’s natural for a seller to feel this way because he or she does not want to alarm among the employees or generate unrest in the business for a deal that may or may not happen.

In cases like these, we have been most successful if the owner has at least a few trusted confidants that can act as proxies for some of the functional area leaders. In this case, you will not have an army of twenty functional leaders from your organization meet with the respective leaders on the seller’s side, but you may compile lists of questions that will be directed through a Vice President of Human Resources or a Vice President of Operations that the owner trusts. As much the owner wants to maintain confidentiality, we strongly advise he or she has at least one or two others from the organization involved in the transaction and due diligence.

If the owner wants to keep the acquisition completely under wraps, it is up to you to make a business decision of whether or not you want to continue pursuing M&A with the company. If you do continue down the path, you should have strong reps and warranties because you are not able to conduct accurate due diligence prior to the transaction closing. This way, there will be some recourse for you should you discover anything after the deal is announced and you have already taken over the company.

* This question was asked on our webinar “M&A: From LOI to Close.” Learn more about Capstone’s webinar series.