What should you know about acquisition due diligence?

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If someone is on a backcountry road they might encounter a farmer out trying to sell his truck. You drive out there, open the hood and kick the tires. With a firm handshake, you agree to strike a deal. You like the truck and hand him a cashier’s check. The wizened old man might say, “There was a day when you could cut a deal on a whole section of land just on a handshake. Different times back then.”

History of Acquisition Due Diligence

The reality of a handshake is that it was a formal greeting invented to make sure the other party didn’t have a weapon hidden that they might use on you during a diplomatic mission. Due diligence is the same idea. The term itself came out of the Securities Act of 1933. While all history reports on multiple reasons for the 1929 crash of the market, a comment made in the media earlier sparked new regulations. People in 1929 saw the Crash as the result of “a speculative orgy” implying that credit controls were lax at best. This led to legislate “full disclosure” clauses to be developed by vendors when they sold their stocks. They wanted to make sure valuations were not artificial.

Current Acquisition Due Diligence

Now due diligence is vital, not only for the consumer, but for companies who are looking to expand their interests by merging and/or acquiring another firm that is compatible. Taking steps early can save both parties a great deal of headache. Many times a third-party is contracted to ensure the objectivity of the various audits. The other advantage to utilizing a third party is that due diligence usually absorbs skill sets that you bill out at a high rate (CPA’s, and lawyers). The third-party, specializing in this area can use those resources more efficiently. That helps you focus on your business instead of siphoning off resources for the acquisition research.

Areas Examined during Due Diligence

The due diligence process (framework) can be divided into nine distinct areas:

  1. Compatibility audit.
  2. Financial audit.
  3. Macro-environment audit.
  4. Legal/environmental audit.
  5. Marketing audit.
  6. Production audit.
  7. Management audit
  8. Information systems audit.
  9. Reconciliation audit.

Specialization

Reaching back to the original reason for due diligence, for some people the areas of most intense scrutiny revolve around how the money is handled in a company. For that specific element you want to look for third-party firms that are adept at handling due diligence for finance companies and portfolios. Further if even the underwriting of the deal is a burden on your company’s infrastructure you can find third-parties that will help relieve that burden. No matter what choices you decide to make around a merger or acquisition, getting a team together to complete due diligence is the first step.

 

 

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