Buyer's Due Diligence: Purpose

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​Simply put – an additional opportunity to investigate a potential acquisition/venture.

The M&A process should begin with a strategy that defines business objectives that may include M&A  – Joint Venture (JV), Merger, Acquisition. If M&A is a part of the strategy, there should be:

  • Tangible (hard) measures – profitability… cash flow … market share … strategic growth
  • Soft measures – How will the company better fulfill its mission to its constituents (employees, communities, vendors, customers etc.)?

A good example of the soft measures would include Procter & Gamble’s Vision for Environmental Sustainability, “…100% renewable energy powering our plants, zero consumer or manufacturing waste going to landfills, and products made from 100% renewable or recycled materials.”

Due Diligence is an opportunity for qualified personnel to investigate the fit with a company’s strategy – hard and soft goals.  Qualified personnel are technically competent to assess the soft and hard goals, and they thoroughly understand the acquiring Company’s goals.  If they don’t understand the Company’s strategy and goals, how will they assess proper fit with the strategy?

One of the first steps will be to understand the investment goals.  A well-managed Business Development process will summarize the acquisition goals for a specific investment in a 1-2 page summary that includes:

  • The name of the executive sponsor – that one executive employee who will be held personally accountable for achieving the successful acquisition and integration/transition.
  • An executive summary describing the reasons and justification for the acquisition that addresses both the hard and soft measures.
  • A financial summary of expected results, including contingency plans, which will improve the probability of success.
  • A summary of the critical success factors – both hard & soft measures if appropriate.
  • A high-level transition/integration plan that defines key responsibilities, critical milestones, costs and expected acquisition benefits.
  • As Due Diligence teams are formed, they must prioritize assessment activities around the critical success factors. Their assessment will include:
  • Validation of the assumptions in the acquisition summary – e.g. sales/margin, cash flow expectations and business growth prospects.
  • Identification of upsides and downsides to the acquisition summary – e.g. additional QA training to raise the target to the buyer’s business standards.
  • Develop initial transition/acquisition plans, including a summary of issues and likely transition costs/opportunities – e.g. software upgrades necessary to effectively integrate operations with the parent Company.

Until the on-site or data room Due Diligence begins, the investment criteria are mere estimates, and understanding the target company is speculation… expected transition plans are built on assumptions.  

As you begin the Due Diligence, prioritize your activities to accomplish the most within defined time and information constraints.