In this chapter from our Transaction Management eBook, Tara Waters, Partner and Head of Ashurst Advance Digital, discusses how due diligence has evolved over the years and considers what the future might look like.
Professional advisers are regularly asked to provide a fee quote for conduct of due diligence in relation to M&A, ECM and investment transactions. The typical response to this question is "it depends". As frustrating as this response will likely be, it is the correct first response.
When it comes to due diligence, the work required genuinely needs to be tailored to not just the facts and circumstances of the transaction, but the preferences and requirements of the client. Notwithstanding this, it is often the workstream that clients question the cost of most frequently, at both the quoting stage and the billing stage of the transaction.
Why is this?
Due diligence goes straight to the heart of the value of the business or assets being acquired, sold or invested in. Mistakes and oversights in due diligence can have real dollars and pounds consequences. Put simply, due diligence matters.
However, clients rarely want to pay for diligence exercises on a time and materials basis because they know that their adviser is capable of filling every waking hour until the deal signs conducting due diligence.
In most cases, large teams are deployed to crawl through document data rooms, chasing down concrete answers to the Nth degree across a full range of topics, including corporate structure, compliance and technical infrastructure vulnerabilities. And, while a client might say they only care about a handful of core issues, ignorance is never bliss when it comes to transaction due diligence.
Cutting corners in the name of lower fees is not the answer.
So, what is the answer?
Enter playbooks and technology.
While each due diligence exercise needs to be tailored to the specific transaction and client requirements, market practice has developed across specific types of transactions and industries. Experienced advisors know what really matters and where to look for issues.
That doesn't mean they ignore everything else, but they can quickly assess key diligence matters before deep diving into the minutia. Playbooks can be used to ensure all due diligence team members understand the scope of the review required and that outputs are consistent. Increasingly, playbooks can be automated so that only particular outputs or risk categorisations trigger follow-up work. Clients can phase their costs and make more informed decisions about where to spend their money next, or even automate some decisions as to whether further work is required.
Technology solutions for report compilation
How the results of due diligence get compiled and conveyed to the client has long been a manual and inefficient process. Because different advisers cover different topics, it can be a laborious exercise combining all relevant information into one cohesive and comprehensible report. It is not uncommon for a report to be, firstly, internally inconsistent and, secondly, largely unread by the client. A client might also have a specific template they need to complete to get necessary internal approvals, meaning someone has to duplicate work to distil the due diligence report further into the client's template.
New technology tools can help streamline or even automate compilation of due diligence reports and/or at least their inputs. These range from AI document review and extraction tools to collaborative drafting tools. Instead of assigning the task of manually assembling, proofreading and redrafting a report from over a dozen internal sources, technology tools enable all relevant parties to provide their inputs using common standards and forms that are more easily editable and can be fed directly into dynamically generated reports and business templates. Combining these with a client-facing platform that allows reviewers to immediately flag important issues or risks to the client through visual dashboards and issue summaries (rather than a hundreds of pages long report), improves the experience for clients and gives them a much better view of the overall workstream in real-time.
Through playbooks and technology, advisers can better achieve the purpose of due diligence – enabling their client to have a real-time picture of the business or assets that are the subject of the transaction, thus enabling them further to make data-driven commercial decisions about how they wish to conduct the transaction.
This is a chapter from our eBook Transaction Management: Is technology taking over the deal? You can read more insights from legal industry voices on the role technology is playing in the transaction management lifecycle in the book. Download the eBook today.