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How to conduct due diligence?
Success of M&A may hinge on quality and depth of due diligence
No matter the size
of your business, mergers and acquisitions (M&A) are one of
the fastest ways to grow your business. No wonder there is
so much M&A activity all the time. Having said that, it
may be pointed out that vast majority of M&A destroy
shareholder value (analysis based on large, publicly-held
companies; data for privately-held, small/medium companies not
available), but business leaders like M&A for a host of
reasons. So chances are that you will be engaged in an
M&A transaction at some point in your career. We at
iProceed actually believe that small and medium enterprises that
often lack the capital to grow rapidly can use M&A to expedite
their growth trajectory.
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Talking
about M&A means that you will need to conduct due
diligence as well. This article talks about the value
of due diligence and what are some of the key activities in
due diligence.
Why is due diligence important?
- No company is 100% honest. Either
due to genuine errors or to reduce your tax liability or
to fool Wall Street, all companies massage the
data/information. While a lot of it is legal or
falls in a gray zone, some of it is outright illegal and
if the enforcement authorities had the resources to
research each company, a lot more companies will be in
trouble. The process of due diligence allows you
to at least get a sense of how reliable the information
is that is provided to you.
- Companies that actively position
themselves as acquisition targets are more likely to
massage their numbers. Due diligence will allow
you to analyze their numbers more closely.
- Due diligence also allows the seller
and buyer to renegotiate the price if the buyer
determines that there are problems with information
(value of assets, likelihood of lawsuits, robustness of
technology, etc.) or certain projections are
unrealistic.
How to conduct due diligence?
- Start with an open mind. Don't
assume that you will find anything wrong and look for
it. What you want to do is to identify trouble
spots and ask for explanations.
- Get the best team of people. If
you do not have a group of people inside your company
that can do the task (e.g. lack of staff, lack of people
who know the new business because you are acquiring a
business in an unrelated areas, etc.), there are due
diligence experts that you can hire. When hiring
such firms look for their experience record in the
industry.
- Get help in all areas: finance, tax,
accounting, legal, marketing, technology, and any others
relevant to your case so that you get a 36-degree view
of the acquisition candidate.
- Talk, talk, talk. Customers,
suppliers, business partners, and employees are great
resources.
- Take a risk management
approach.
After all, M&A is a lot of risk. So while you
want to do your research, you also want to make sure
that you do not antagonize the new team of people by
going crazy with questions.
Related articles: Mergers
and acquisitions in blogosphere
Poor
logic for acquisition of Shopping.com by eBay
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