I want to talk about the minefield I call ‘Due Diligence’. I also want each of you to understand that your particular industries may be very different and thus require different kinds and levels of due diligence. Therefore, you need to consult with your outside accounting firms and/or attorney(s) for further discussion.
I am fortunate to have been involved in a number of acquisitions over the years, some big and some not so big. It’s a great area of accounting and financial work which allows you to understand how businesses operate from the ground level. However, this is an area that requires collaboration between people who are knowledgeable in such matters, such as your company attorney and outside accounting firm.
If you happen to be working for a publicly held company, most of those companies have well developed processes and procedures to guide them through the process. But what are some of the things (and certainly not all) you should be worry about. Many small to medium enterprises (SME’s) achieve growth through acquiring other businesses………..sometimes in the same industry and sometimes not. If you are a controller involved in or leading the acquisition team, be careful. If the acquisition goes great and prospers, those who brought it to the table will generally get the credit, not you. That’s fine. If it fails during the process or turns out to be a dud after acquisition, you will likely be tainted by it or directly blamed. If you have ever participated in the acquisition process, you should have built a checklist the first time and then refined and modified it as acquisitions were made. But if you have no experience, you need to study how this process works and begin to build your checklist. . There are some great examples out there on the Internet, and on websites like AICPA.org if you are a member. I also recommend you visit the website of John Wiley & Co for books and manuals that might be of assistance. Pitfalls abound in the acquisition business. Trust me.
Critical to the process of buying a company is understanding that there can be limiting factors to its’ success. First, understand why the company is for sale. Reasons may include:
- Owner wants to cash out and retire
- Owner lacks capital to remain in business
- Owner is afraid of continued credit risk
- Owner does not feel capable of managing his company’s continued growth (result of rapid growth)
- Owner is seeing a decline in his business
- Owner is struggling with compliance issues (this can be an expensive area depending on your industry)
There are numerous reasons but I think the above covers a lot of them. Whatever the reason, you need to apply the same due diligence learning why it is for sale that you would if you were buying a previously owned home for your family. Wouldn’t you ask the homeowner ‘why are you moving?’, ‘how are the schools in this district?’, ‘what about the crime rate?’, etc. You need an honest answer about why the business is for sale just as much as why that home is for sale.
Another area requiring skepticism, from my own past experience, is the appraisal that you are presented with. Many businessmen, realizing the time has come to sell, will pay for an appraisal. However, the true value of a business is what someone is willing to pay in an arm’s length transaction. I have seen a number of big appraisal books, plenty of drawings and photos, etc. They can be works of art, and they are not cheap. Do not accept an appraisal as the gospel. Unfortunately there are not a lot of comparatives out there. In the home buying business yes, not in the business buying business. That’s a serious challenge.
Next week we will talk more about the acquisition process. By the way, that includes a discussion of ‘falling in love’!
In the meantime if you have any questions, submit them below.