Henry Fairpo is a founder and special projects maestro at The Castaing Group, a professional services firm that specializes in providing embedded management, corporate advisory and valuation services to a range of companies and advisors in the technology and consulting sectors. In the 30 years of experience Fairpo brings to his role, he has worked as a senior manager at Ernst & Young, corporate finance partner at PKF, and group CFO at Fjord — just to name a few. At Castaing, most of Fairpo’s time is spent advising on fundraisings, company sales, acquisitions and pre- and post-deal support for growth-stage tech businesses.
Due Diligence: Common Misconceptions
During Fairpo’s time working with growth-stage companies, a common misconception his clients often have about the diligence process is that it’s going to be lightweight. “They underestimate the sheer amount of effort that’s going to be involved,” he explains. So early on in the process, Fairpo clarifies the amount of work required and the reasons behind the often disruptive questions. As part of this groundwork, he advises his clients to seriously consider who is running the business and who is running the transaction. This distinction is important, as Fairpo has seen transactions disrupt businesses too many times. He explains how a business will get part way through an acquisition and become distracted, resulting in a price drop due to the business’s drop in performance. This is why, “having that preparation in place, working with them [the counterparty], thinking about what you’re going to need — and to be honest, getting your data room up to speed as early as you can,” are key factors for Fairpo when prepping for due diligence.
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Prepping for Due Diligence
Fairpo’s best piece of advice to first-time sellers, acquirers or fundraisers is to “start early — in fact, start earlier than that.” Additionally, he urges clients to bear in mind that “just because something happened five years ago, doesn’t mean it’s not going to be of interest.” Therefore, taking the proper time required to find and address any potential issues is imperative. “If you start from the worst case of every document with a third party and every internal document you’ve ever shared with an employee you may need to use, then it’s all good news from there on.” Fairpo elaborates by explaining that it’s the everyday bits that trip up his clients and string out a transaction; however, “if you’re prepared, if you know what you have, and you know where there are holes or any skeletons, then you can address those early, and that avoids that problem.”
“If you’re prepared, if you know what you have, and you know where there are holes or any skeletons, then you can address those early, and that avoids that problem.”— Henry Fairpo
Within the preparation process is an element of perception that Fairpo believes is important to create and uphold during due diligence. If a seller looks organized, a buyer can get comfortable; similarly, if they look disorganized, the buyer may begin to question everything, extending the process and risking chipping on the price. This is another factor that plays into the importance of a data room for Fairpo: if all documents are uploaded on time in a proper data room, creating the assumption that you have everything under control, it allows the entire process to run increasingly smoothly. Despite this, he points out that just because you may be organized doesn’t mean you can assume your counterparty will be. This means working with them to ensure their advisors are keeping up is important.
When to Start Preparing
Regarding the deal preparation timeline, Fairpo finds it beneficial to start staging a deal early in the process. He suggests beginning to stage as you prepare your sales memorandum, or, if you’re doing a fundraise, building your data room alongside updating your projections and business plan. Collecting the materials you need simultaneously while prepping, is a great way to evaluate how prepared you are to pitch, and it relieves some of the pressures of due diligence. “The worst thing you can do is go into it rushed, go into it too early, or not manage those expectations,” Fairpo points out.
“The key thing to remember is, a data room is going to contain the crown jewels of the company information. You want to have control over that.”— Henry Fairpo
The Importance of a Data Room
A dedicated Firmex client since 2009, Castaing’s virtual data room usage has been essential to their operation and success. Fairpo shares how, “the key thing to remember is, a data room is going to contain the crown jewels of the company information. You want to have control over that.” When evaluating the proficiency of a data room, he ensures a data room is intuitive, provides a high level of control, is equipped with uploading and downloading features and possesses Q&A functionality. People often forget that “the data room is actually vital post-deal as well as pre-deal,” Fairpo says. In the pre-deal context, he finds that populating a VDR occurs naturally as part of the initial interaction. “Put that first level of information in there that allows your counterparty, whether a funder or potential purchaser, to see the core things they want to see. And then, have a second round that involves getting that DD information up there.” In the post-deal context, Fairpo shares that keeping a data room open is often necessary considering a potential investor or acquirer will require the records to reference back to at a later date. “It isn’t dead data just because the deal is done. It’s live data, and will actually live with you long after that transaction,” he acknowledges.
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During the due diligence process, Fairpo finds the core risks that require mitigating are generally industry and company-specific, but he pays attention to global news and trends since such issues will likely be at the forefront of everyone’s concerns. He also recommends paying close attention to any uneasiness a purchaser or funder may have during initial conversations in order to ensure those pieces are polished and ready for viewing. When an issue does arise, Fairpo stresses the importance of establishing and presenting a proposal for how it will be handled. This should be done in a manner that showcases any potential complications as non-issues.
The Difference Between M&A Due Diligence and Fundraising Due Diligence
When it comes to the differences between facilitating M&A due diligence and fundraising due diligence, Fairpo explains how the two processes differ greatly. Each process begins in a similar manner in the way that both require the counterparty to take a hard look at the business and evaluate what needs to be covered in the agreement. In fundraising due diligence, a funder is already bought into a transaction at the point of due diligence and because they and their investment committee have already committed, the process is mainly supportive and revolves around analyzing which areas of the business require investment. In M&A due diligence, the process can feel more confrontational since there are advisors in the mix who act as gatekeepers. With the goal of trying to protect their client, they play the part of “a counterweight to their client’s enthusiasm.” Rather than looking for support areas, they’re considering any potential issues and looking at the logistics around integration and culture. Additionally, because M&A has very strict timelines, the due diligence process is often much faster than that of the fundraising process.
How the Due Diligence Landscape Has Changed
As for some final words, Fairpo touches on how over the last ten years, there have been many changes in the way diligence is conducted. In addition to the process becoming increasingly remote, the data room has become the hub of a transaction. In past years, conversation would occur outside the data room, whereas now everything is channeled through the VDR. Factors such as COVID-19 and ESG have also increased the scale of data rooms. And, in regards to ESG, Fairpo mentions how it has brought “a real focus onto corporate ethics.” Additionally, due diligence has experienced an elevated emphasis on compliance. Fairpo explains how this has been due to heightened government regulation, elevated activity from tax authorities and increased press coverage. Further, because everything is done digitally now, there is more scrutiny. Increased digitization “is driving the compliance, which is driving the risk, which is driving the DD.”