CFO Insight LLC
Considerable work is completed before a team begins fieldwork or to review documents in the virtual data room. Prior to fieldwork, numerous companies have been assessed to select the acquisition target that fulfills the Company’s strategic objectives. Preliminary valuations have been prepared and key assumptions have been identified. Alternative negotiation parameters have been established. Confidentiality agreements have been negotiated and exchanged, and the Company is ready to assemble the Due Diligence team… now what?
Let the acquisition strategy be your guide to selection of the Due Diligence team. Identify the critical success factors, and engage experts who are accountable for these value drivers. What are the critical success factors – those few items that will make -- or break -- the transaction’s success? Could a critical success factor be the intellectual property (IP)? ... Or perhaps the well-maintained factory, now operating at 65% capacity? … Or perhaps the exceptional sales organization? Each of these critical success factors will require a different level of review to protect your investment.
Let’s assume that in this example, these three items represent the foundation of the company valuation. Unique products (IP), now produced effectively in the factory (…profitable and appropriate quality…) able to absorb production of the new owner’s products – all sold by the exceptional sales organization. The Due Diligence review should focus on these valuation elements to ensure that the acquisition meets the strategic goals. Who should be on this Due Diligence team? In this example, experts are required in each of these areas – an intellectual property attorney… a senior manufacturing executive … and a senior sales executive. All are under the guidance of a sponsoring executive – the internal leader who will be held personally accountable for the transaction’s success. The leader will be critical, since she (he) must be familiar with all functional areas, and also understand the M&A process. An acquisition is not merely an accounting exercise where historical financial statements are reviewed as the basis to negotiate the deal. An acquisition is buying the future. Due Diligence can include an assessment of historical financials, but the key to value is the result of the acquirer’s actions once the deal is complete. Due Diligence will help identify how the acquisition will create future value for the new owner… considering integration and transition costs to reach the new owner’s strategic goals.
The leader’s responsibilities include understanding the valuation elements, critical success factors, integration/transaction strategy, and the transaction process. The deal process itself may range from systematic, to chaotic and unscheduled. The leader must be able to assess the transaction flow, and manage the team to a successful conclusion. And a successful conclusion may include ‘…walking away …’ Unfamiliarity with any of these elements will increase risk in an already high-risk venture.
Round out the team with other experts who will advise these key executives in the Due Diligence process. Who could these advisors include? … Tax experts … accountants … environmental technicians … organization & development executives … international sales …
Advisors vary with every deal, and depend on the transaction type (…JV … asset acquisition … stock deal … all cash … owners retained/terminated…). The leader should be familiar with the transaction elements and select the team members to address the highest risks. Team members need not be permanent members of the team, but may only participate in selected areas of the transaction.