Maximize value by preparing for due diligence

06.12.2011 - Mergers & Acquisitions

Few business activities are more complex or risky than consummating an acquisition of a privately owned company. Consequently, and especially in light of today’s litigious environment companies about to be acquired will undergo a thorough due diligence examination.  The objective of due diligence is to confirm all material facts regarding a company prior to completing a transaction.

As a direct consequence of the financial crisis buyers have ramped up their due diligence efforts.  They look at business operations, performance, and systems in the smallest detail to avoid the risk of learning of some material defect after acquiring the business.  This is a particularly important issue for companies that did not fare well during the recession.

This in depth investigation is undertaken by potential acquirers to evaluate a company and its business prospects.  Companies seeking to raise capital from outside investors, which generally are minority investments, can expect to experience the same procedures.   Prospective investors want the same information.

Most business owners are unfamiliar with what this time consuming process entails and underestimate the challenge.  As in all aspects of business, advance preparation is the key to successfully selling a company and will help mitigate the distraction.

Today there are numerous due diligence checklists readily available for business owners to begin preparing for the process.  In addition, many professional service firms have developed a major practice providing a complete range of “due diligence” services to firms buying a company or selling a company.

Of late, we have noted a growing trend among business owners of engaging professionals to conduct due diligence procedures on their behalf before putting their company up for sale.  They seek to maximize value of the company by identifying obstacles, anticipating problems and avoiding surprises that might have a detrimental effect on a company’s value by taking preemptive action.

Key areas buyers will focus upon are: (1) general corporate background including policies and procedures, (2) financial Information, (3) products and services – market opportunity. (4) customer base, (5) operations, (6) competition – industry conditions, (7) marketing, sales, and distribution, (8) research and development – Intellectual Property, (9) management and personnel – human resources and (10) legal, tax and regulatory matters – contracts and agreements.

Look for further details concerning each category in a future post or as a new item in the Tool Box section of the website.