As experienced middle-market aerospace and defense company executives, you are well acquainted with the concept of performing due diligence. On August 22 last year, we wrote a Deal Note® entitled “Buyer Due Diligence”, which provided a brief overview of buyer due diligence in the middle market of the aerospace and defense industry. Today, we share with you the truth about due diligence as it relates to ways that buyers can use the due diligence process to reduce the purchase price.
The stated objective of buyer due diligence is to afford the buyer the opportunity to verify that all the information that the sellers have previously provided (typically through a Confidential Information Memorandum) is accurate and complete. However, as we said on August 22, 2022, “If a seller cannot successfully navigate through buyer due diligence, then there is no need for a purchase agreement.” Investopedia reported in April of this year that 70% of all M&A deals in the middle market fail to close because of issues found during due diligence.
And therein lies the truth about due diligence: the buyer has tremendous leverage during the exclusive due diligence period and can terminate the purchase agreement at any time. Thus, rather than just seeking to confirm information, buyers also use the due diligence process to look for any issues that can support a position that information provided prior to due diligence was either incomplete or inaccurate. Reputable buyers will not lower the purchase price post letter of intent without good reason. However, if a buyer can find issues in due diligence that might support a reasonable argument to lower the purchase price, then, in our 22 years of experience, they will take advantage of those opportunities virtually all the time.
In a future Deal Note® we will address ways sellers of middle market aerospace and defense companies can protect the price from falling during this important and difficult window of time.
Have a Great Day!
Managing Director, Defense