Due Diligence – ‘Falling In Love & Other Pitfalls’ – Part II

 

For many people, the work of acquiring companies is an exciting and invigorating process.  It can improve morale and provide new motivation for the Controller/CFO and finance team.  This is where we get to put our accounting skills to work.  We’re glad to see our business growing (and usually  glad that we are the acquirer not the acquired company).

Making an acquisition is not something that happens in a vacuum or a sterile environment.  If you are working closely with the target company, you get to know the people.  Sometimes you can even bond with them.  You may fall in love with the idea of new challenges, new people, new projects.  When this happens, we have a tendency to filter out those little warning signs and even some big warning signs.  When this happens we have moved into a situation where we are no longer independent.  This poses serious risks for you and your company.  There is not a simple solution to this problem.  I have been a victim of the ‘falling in love’ syndrome and experienced deep disappointment when an acquisition failed to go through.  I think the more experienced we are, the better able we are to remove the emotion from the equation.  What are some ways to avoid this? (Back to my checklists):

  • Start two checklists:  One is for pros and one for cons.  Be honest and list every good reason why this purchase should not be made (even if you are the only one that will see this list)
  • Referring back to Part I and understanding why the business is for sale………..the reasons may belong on your ‘cons’ checklist.
  • Try to think of yourself as the consultant on the acquisition project.  If you were brought in from the outside to assist in evaluating and valuing the business, it would be assumed that your findings would be based on the fact pattern alone.
  • Remember – everyone at the target company will be on their best behavior and any eyesores or outward manifestations of a problem could well be hidden from you.
  • Generally,  a company attorney is involved.  Attorneys are very risk averse and often get a lot of push back as they write or review  Purchase Agreements.  Make sure you understand the risks from the attorney’s point of view.
  • There are different ways of structuring a purchase, primarily stock or asset purchase.  Your attorney should be your guide.
  • Most acquisitions transpire under the veil of confidentiality.  It is difficult then to find out what suppliers of the target think about the company, or anyone else for that matter.   A supplier can often provide some great information on their customers.

I urge you to remember that in most cases, if the current acquisition doesn’t work out, take your buying power elsewhere and find a better investment for your company.  It is a lot easier to buy a company then it is to shut it down after a couple of years as an under performing asset.

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