Growth is a key factor in every company’s long-term survival, and mergers and acquisitions (M&A) can provide exceptional opportunities for growth. M&A professionals are expressing guarded optimism that 2010 deal activity will increase, led by strategic buyers and distressed sales.
However, given the economic environment, financial information may be more suspect as sales are uncertain and costs may be artificially low. To help minimize a buyer’s risk, it is more important than ever to understand key business drivers and perform the appropriate due diligence.
You need to be as comfortable as possible that there will be no unpleasant surprises post-close. With appropriate due diligence, the risk decreases that unknown issues and surprises will result in a deal being more expensive than expected. Be prepared to commit the time and resources you will need, as a common mistake is underestimating the time and resources for due diligence and integration.
Due diligence forms the basis for identifying the potential risks, understanding the target business, and providing improved analysis and decision making. This means identifying potential red flags, focusing on key areas, and taking an objective point of view. A professional due diligence advisor can help you to better accomplish these tasks and increase your odds of success.
Due diligence analyzes many areas of a target company
Let value be your guide for the due diligence. Focus on the areas that have the greatest impact on value. A good place to start is your financial model. It is important to dig deep in areas that affect value, but do not lose track of the big picture. Key areas of focus are the following:
• Quality of earnings, working capital, and business trends
• Tax structuring and valuing the transaction
• Purchase price mechanisms and important definitions
• Understand financial covenants and credit agreements
• Identify operational and capital expenditure requirements
• Industry trends and customer concentrations
• Financial statement impact and conformity of generally accepted accounting principles (such as inventory valuation)
• Employment matters
• International and start-up operations
Common red flags should get your attention
Although every deal is different, beware of the following:
• Loss of focus on the core business
• Only the CEO or an influential manager believes in the deal
• Cultural considerations are given only a perfunctory review
• Synergies focus on revenue enhancement (without identifying cost savings)
• Underestimating the time and resources needed for due diligence and integration
• Lack of appropriate infrastructure to meet your expectations post acquisition
• Customer and supplier concentrations
• Lack of deal experience and outside expertise
• The limit price increases during bidding, with numerous bidders
• Emphasis on how much time, money, or reputation has already been sunk into the deal, “forcing” the deal to close
Use experienced and trusted business advisors
Build a network of trusted advisors who are objective and focused on your long-term goals. It is important to receive objective recommendations and input that will help mitigate any “deal fever” or conflict-of-interest bias inherent in an acquisition.
Although it is possible to handle due diligence internally, it can be taxing on senior management and respective finance teams. Phases that may have taken three to four months a few years ago could now take double that time. Due diligence professionals help manage the peaks in the process, allowing senior management and finance to handle important deal issues and plan the integration, while staying focused on running their current business and reducing deal fatigue. Due diligence professionals supplement your team, allow the entire process to be more efficient and effective, and let you focus on issues that could impact the company post-close.
Acquisitions are a great way to grow your business and capabilities. To increase your odds for successful growth and better long-term business decisions, please contact us to help you with your diligence process.
For more information about due diligence, or to discuss any other aspect of purchasing or selling a business, call Jim Gettel or Brad Kussow at 888-556-5580 or 414-463-4411.