The importance of due diligence to the success of a transaction is often underestimated. We thought it might be useful to put together a few pointers to keep in mind while running a due diligence exercise on a business you are intending to buy. A more thorough explanation of what is required is available to subscribers.
Approach the whole process with a very objective and critical eye. When you have seen a business to buy it is very easy to get carried away and marvel at your own cleverness at seeing such a good opportunity. But always remember that it is much easier to evaluate what has been presented in a memorandum of sale than to spot what has been left out.
Get the right advisors
Buying a business is a team effort and the most important members of your team are your accountant and your solicitor. Make sure that you have a good working relationship with both and they are properly instructed. If you need to appoint new advisors do so on recommendations to ensure they have the appropriate skills.
Plan it, scope it
Define the scope of the due diligence exercise and clearly mark out who is doing what and when. Work to a timeline. In order to conduct a thorough investigation you must have everything in order before the due diligence process begins. In fact, you must start your due diligence preparation and information gathering the moment you decide that you are interested in a particular business. You will need the following:
An exact step-by-step plan of the entire due diligence exercise.
All of the information and relevant items you need from the seller before you start the analysis.
A checklist of… (more available to subscribers)
Thorough due diligence should pick up any issues, risks and potential liabilities relating to the seller’s employees. For instance, check if there are any past or present employees litigating against the business. Other important areas to look at might be the following.
Do any of the employment contracts have unusual clauses i.e. over-the-top redundancy packages?
What are the specifics of the pension plans?
What is the bonus structure and is it rewarding performance fairly?
(more available to subscribers)
Move fast, top down
It is important to spot any issues early on so that the appropriate warranties and indemnities can be quickly put in place. As these are legal documents, which are meant to protect both the buyer and seller from things going wrong, they can be complex, expensive and take time to put together. Focus on major issues first.
Communication is vital
The flow of communication between the buyer and his/her solicitors is of paramount importance, for if they do not work closely together, the process can quite simply fail. The buyers must communicate the key issues of concern to their solicitors; they should not just assume that all areas are of equal importance, and that everything will be dealt with in good time. Continually monitor the activity of the solicitors and accountants carrying out your diligence and make sure they are giving you regular feedback.
Don’t forget the culture
Funny how the lack of understanding of the target’s company culture is one of the main reasons for failed acquisitions, yet this has been notoriously ignored in the due diligence process. Don’t make the same mistake. This is usually one for the purchaser’s management to consider, rather than delegating to legal or financial advisers. Map out the management styles of your business and the target business. In the report we look more closely at the culture of a business.
Collect information, then analyse
Don’t let any of your advisers analyse whilst collecting the information. These are two distinct activities within the due diligence process. First find out where the required information is, then collect the information, recording its source and noting whether it is fact or hearsay. Then start an objective analysis.
Finally, make sure you differentiate between fact and opinion. Information that is presented as fact should be signed off by the target company’s directors.
Don’t panic, take your time
A focused but comprehensive approach is better than taking shortcuts in order to reduce costs. Often the buyer discovers that ‘thin areas’ of diligence need to be covered again in more detail, ultimately consuming extra time and costs.
In partnership with the Business Sale Report Smithfield Partners Solicitors and WM ProServ LLP, accountants are offering £5000 worth of free legal or accounting Due Diligence. What is the catch? This offer is only available to the first 5 companies that apply via the Business Sale Report. To qualify you just fill in our due diligence enquiry page.
We wish you luck in finding a great investment for 2010!