By David Braun, CEO of Capstone Strategic, and author of the book, “Successful Acquisitions”
What comes to mind when you think of “due diligence?” Most people picture an army of lawyers and accountants who pore through financials and company records after the letter of intent is signed. Once they uncover the significant risks, the deal is renegotiated based on their findings.
Traditional elements of due diligence typically include:
- Evaluating strengths and weaknesses. The release of more detailed information gives you an in-depth look at the seller so you can evaluate the company’s true strengths and weaknesses, both financially (for example, most profitable products) and operationally (such as least efficient divisions).
- Uncovering liabilities. Hidden problems could prevent you from realizing true synergy from the soon-to-be formed company; such issues as past litigation, a questionable patent, or an aging piece of equipment.
- Renegotiating based on findings. If your first in-depth look at the books reveals that not everything is as it seemed, you will need to renegotiate the monetary terms.
- Checking the boxes and filling in the blanks. The overall purpose of due diligence is to ensure that there are no surprises or ‘‘gotchas’’ when the transaction is completed.
Although all of these are valid, I find this list incomplete. Too often due diligence is seen as a straightforward checklist of chores. In my experience, there are many more aspects of due diligence that can be used to your advantage.
Start Due Diligence Early to Get a head start
Conventional due diligence is a formal procedure that begins late in the buying process. At my firm, I recommend clients start due diligence at day one. Understanding the quality research early on protects your company from costly surprises later and makes the formal vetting that is eventually required far smoother and less disruptive.
Naturally, you will need to research companies as you search for acquisition prospects. This “pre-due diligence” will help you screen out those with glaring liabilities. Instead of pursuing a prospect that you know you do not want to acquire, you easily can change course and save your time and resources.
By the time you reach formal due diligence you should be confirming – not learning. Your prior research should have been so thorough that the new data you receive should support what you already discovered rather than reveal important new information. There should be few if any surprises after the signatures have dried on the LOI.
Although most people focus on uncovering hidden liabilities, due diligence also can uncover hidden opportunities ─ one of the best ways to get the most value from your research. As you are combing over details of a target company, focus on identifying enhancements as well as problems.
Throughout due diligence, you should be on the lookout for ‘‘stars’’─ employees who quickly grasp the rationale and value of the merger when they are informed about it. For instance, if you are buying a company to open up your product to new geographic markets, an experienced sales manager who knows the region can be an extremely valuable resource.
These opportunities should fit into your acquisition strategy. Discovering opportunities will allow you to predict future synergies between the two companies once they have merged.
Use Due diligence for Integration Planning
Think about due diligence as an aspect of integration planning. The details you discover will suggest valuable new ways to combine the acquired entity with your company. If due diligence is the gathering of information, integration is the implementation of what you discover. The two processes fit hand-in-glove.
For instance, you may discover inefficiencies in a particular division that contribute to reduced output. Correcting this once the deal closes could rapidly improve the bottom line.
Due diligence is an extremely important piece of the acquisition process and often the most demanding. My hope is that by viewing due diligence as an opportunity rather than a chore you will be closer to realizing the full potential of your acquisition.
This post is adapted from David Braun’s book, “Successful Acquisitions,” now available at Amazon.com