1
PRE-LOI
Kick the tires:

The importance of pre-LOI due diligence

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QUESTIONS TO ASK

Are seller (or banker) representations reasonable?

DISCOVER

If all seller (or seller representative) representations and proposed adjustments are positive, you should be skeptical about what negative items have not been disclosed. Do your due diligence to vet key representations and pro forma adjustments that seem too good to be true.

QUESTIONS TO ASK

Do you understand the structure of the entity you are acquiring?

DISCOVER

A quick screen of the organization type before LOI should indicate whether tax basis step-up will be difficult (or possibly not even possible).

EXPERTS WEIGH IN
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What should be considered before the transaction?

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QUESTIONS TO ASK

How do you determine a reasonable level of compensation for owners?

DISCOVER
  1. Each owner’s role and responsibilities are compared to job titles with similar responsibilities.
  2. Benchmark compensation by job title, industry, location, size, and other relevant factors.
  3. Compare owner's compensation as a percentage of revenue to that of similar businesses. The benchmarking data is derived from multiple subscription-based services.

What should be considered from a cybersecurity perspective before entering an acquisition?

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TIP

Understand what is being bought and why.

DISCOVER

If the company is being purchased for its technology platform, be sure that it has a solid technology foundation to build upon. If the reason is for sales/marketing opportunities and the plan is to “rip and replace” the technology platform, then decide how long you can live with what exists.

QUESTIONS TO ASK

What happens to an employee benefit plan in an acquisition, and what is the timing of transition?

DISCOVER

For employee retention, many merging companies combine the best benefits of each. During the due diligence process, benefit consultants, brokers, lawyers, and accountants determine disparities between the plans (including coverage and costs) and take steps to integrate them, which may last more than a year beyond the merger or acquisition.

Merging employee benefit plans in corporate mergers and acquisitions.

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2
DILIGENCE PROCESS

Five items to review in buy-side financial due diligence

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QUESTIONS TO ASK

Are there any potential cost savings/synergies or potential incremental costs resulting from changes in cost structure that should be considered in your investment thesis?

DISCOVER
  • The existence of potential synergies or anticipated post-close cost savings upon integration should be incorporated into the model.
  • Any incremental costs or investments that may be required post-close (such as enhancement of finance / accounting or other back-office functions) should also be incorporated into model.
QUESTIONS TO ASK

What areas should you look at as part of tax diligence?

DISCOVER
  • Income (federal/state/local)
  • Personal property
  • Sales & use
  • Payroll (including 1099 vs. employee categorization)

The two tax liabilities a buyer can’t escape in an asset purchase

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QUESTIONS TO ASK

What should you look for in a reputable valuation firm?

DISCOVER

The valuation firm should have experience in the valuation of intangible assets and be familiar with the various methodologies used to value intangible assets (e.g., the multi-period excess earnings method or MPEEM, relief from royalty method, discounted cash flow).

QUESTIONS TO ASK

What might I need a specific valuation on?

DISCOVER
  • Fixed assets
  • Identified intangibles
  • Rollover equity
  • Other equity instruments

Information security due diligence in a potential acquisition.

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QUESTIONS TO ASK

What can help determine if a comprehensive risk assessment was completed?

DISCOVER

Getting a year-over-year look at risk assessment and the overall risk-management plan can help. It also helps show how risk is being tracked year over year and provides insight as to whether an organization understands that it has risk and what the organization is doing to fix those problems.

QUESTIONS TO ASK

Why does the buyer need to understand potential outstanding benefit liabilities and any termination provisions?

DISCOVER

Any bonus, vacation, pension, or health-and-wellness liabilities or termination provisions should be identified during the diligence phase to avoid delay to timelines for transition plans. In certain instances, changes to employment terms can result in additional compensation or vesting of certain benefits, adding both time and expense to proposed deals.

Four challenges in reconciling benefit plans during an acquisition.

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3
DEAL EVALUATION
QUESTIONS TO ASK

Does the adjusted EBITDA as a result of financial due diligence align with the buyer’s investment model?

DISCOVER

If all seller (or seller representative) representations and proposed adjustments are positive, you should be skeptical about what negative items have not been disclosed. Do your due diligence to vet key representations and pro forma adjustments that seem too good to be true.

QUESTIONS TO ASK

Have you reviewed the purchase agreement definitions?

DISCOVER

Be sure to agree on working capital target and calculation mechanism. Also ensure you have contemplated all items to be included in the definition of indebtedness.

QUESTIONS TO ASK

What kind of structure will optimize buyer tax deductibility and associated filings that may need to be made within a specified time period after the transaction?

DISCOVER

Asset purchases, F-reorganizations, or having the seller make a 338(h)(10) or 336(e) election will allow the buyer to amortize or depreciate the additional value paid over the basis of the assets. The structure will be dependent upon the type of entity and will be part of the negotiation

QUESTIONS TO ASK

Have you structured indemnifications to address any potential tax issues?

DISCOVER

Tip: Consider a lookback period for any tax issues that transfer to the buyer.

QUESTIONS TO ASK

How do I determine the risk level of my investment?

DISCOVER

There are various types of financial instruments that may be used to assess whether an investment meets the risk & return appetite of the organization as a whole.

EXPERTS WEIGH IN
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QUESTIONS TO ASK

What should be considered if there is interest in the target company’s intellectual property?

DISCOVER

Be sure you understand what data-loss controls are in place and whether the organization has sensitive, proprietary information properly secured. Don’t be caught blindsided by an employee who downloads confidential information to a USB drive, uploads it to a cloud repository, and takes it for use not approved.

EXPERTS WEIGH IN
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Reasons to consider an HR audit during diligence

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QUESTIONS TO ASK

What items should be reviewed in evaluating a target?

DISCOVER

A sample of items to look at is as follows:

  • Talent
  • Culture
  • Employee benefit plans & liabilities
  • Compensation programs
  • Employee contracts & policies
  • Legal exposure
4
CLOSING
EXPERTS WEIGH IN
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QUESTIONS TO ASK

Have you considered any impact of your closing date on the working capital target?

DISCOVER

Tip: Consider closing at month end to minimize accounting/timing issues. Also assess any seasonality trends when assessing your target amounts.

QUESTIONS TO ASK

What to do if not all necessary elections have been completed?

DISCOVER

It is important that the various elections be made timely. In some instances, the IRS allows for relief for late-filed elections; however, in some cases, a private letter ruling may be necessary in order to obtain relief, which can be a costly and time-consuming process.

EXPERTS WEIGH IN
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EXPERTS WEIGH IN
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QUESTIONS TO ASK

What valuation may be needed shortly after the close?

DISCOVER
  • Valuation of intangible assets for financial statement reporting
  • Contingent earnouts for purposes of the purchase price allocation and reporting the proper amount of goodwill on the balance sheet
  • Favorable / unfavorable leases
  • Any debt assumed (rather than incurred) from the seller in the transaction
QUESTIONS TO ASK

What should determine the timeline of the transition plan?

DISCOVER

Strategy. If technology needs to be replaced, the process must be outlined and sequenced properly. If the technology is staying and integration with other systems needs to happen, the timeline will most likely take longer.

EXPERTS WEIGH IN
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QUESTIONS TO ASK

When is the best time to implement the transition plan?

DISCOVER

To retain key employees and minimize disruption, a transition plan should be implemented as soon as possible. A transition team should be formed with members being given key tasks, target due dates, and expectations with clear responsibility. Appropriate communication to employees is often where transition plans achieve the best success.

QUESTIONS TO ASK

What type of transaction is occurring—an asset purchase or a stock purchase?

DISCOVER

In a stock purchase, the acquiring company assumes the responsibility for the plans of the acquired company. In an asset purchase, the acquiring company has more flexibility in deciding which assets to take on. The purchasing company may not acquire the existing employee benefit plans in an asset purchase.

5
FIRST 90 DAYS

Three key items to complete during your acquisition’s first 90 days

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EXPERTS WEIGH IN
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What elections/ filings need to be made?

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QUESTIONS TO ASK

Do you need to complete predecessor period tax returns?

DISCOVER

Determine appropriate party to complete the returns and ensure proper allocation of costs to pre-transaction and post-transaction. Specify these roles and responsibilities within the purchase agreement.

QUESTIONS TO ASK

Estimating equity compensation 90 days after an M&A close

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EXPERTS WEIGH IN
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EXPERTS WEIGH IN
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QUESTIONS TO ASK

What is the most important item to consider during and after closing?

DISCOVER

The integration plan. Whether you are going to rip and replace or incorporate existing technology, your IT integration plan is most important to avoid major cyber issues in the future.

Reasons to consider HR outsourcing after the transaction completion

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PEO Added Value:

Employment practices liability insurance

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